WASHINGTON: The International Monetary Fund (IMF) has described Pakistan’s outlook for economic growth as favourable, but warned that recent stability gains have begun to erode.

In a report released on Friday afternoon, the IMF estimates the country’s real GDP growth rate for the current fiscal year at 5.3 per cent and notes that it will strengthen to 6pc over the medium term.

The IMF said last year that Pakistan had emerged from the crisis and stabilised its economy after completing a three-year bailout programme with the fund.

The report credits the “stepped-up” China-Pakistan Economic Corridor (CPEC) investments, better availability of energy and growth-supporting structural reforms for this improvement.

The report notes that inflation remains contained despite a gradual increase while the financial sector is sound.

With reference to the election-year budget, the IMF points out some negative trends that, it says, can harm the positive trajectory.

Says fiscal consolidation has slowed, with the 2016-17 budget deficit target likely to be exceeded

“Macroeconomic stability gains made under the 2013-16 Extended Fund Facility-supported programme have begun to erode and could pose risks to the economic outlook,” the IMF said.

Under the 36-month extended arrangement, the IMF provided Pakistan with $6.15 billion to improve its economy. On the completion of the facility, the IMF observed that Pakistan was committed to pursuing reforms in the post-programme period. It also noted energy sector reforms allowed a reduction of power outages and power subsidies.

The IMF notes that “fiscal consolidation has slowed, with the 2016-17 budget deficit target of 4.2pc of GDP likely to be exceeded. The current account deficit has widened and is expected at 3pc of GDP in 2016-17, driven by quickly rising imports of capital goods and energy”.

The IMF also notes that the country’s foreign exchange reserves have declined in the context of a stable rupee-dollar exchange rate.

On the structural front, while the successful implementation of business climate and financial inclusion reforms has continued, “some renewed accumulation of arrears in the power sector has been observed, and financial losses of ailing public-sector enterprises continue to weigh on scarce fiscal resources”.

The IMF also identifies key external risks, including lower trading partner growth, tighter international financial conditions, faster rise in international oil prices and, over the medium term, failure to generate sufficient exports to meet rising external obligations from large-scale foreign-financed investments.

Executive Board Assessment: The report includes an assessment of the progress made under the 2013-16 economic reforms programme. It quotes IMF directors as commending Pakistani authorities for strengthening macroeconomic resilience in the 2013-16 period. The directors agreed that the growth outlook remained favourable, but noted that policy implementation weakened recently and macroeconomic vulnerabilities were remerging.

Against this backdrop, the directors called on the authorities to safeguard the macroeconomic gains of recent years “through continued implementation of sound policies, and to continue with structural reforms to achieve higher and more inclusive growth”.

They also encouraged the authorities to strengthen fiscal consolidation. They noted that the 2017-18 budget aims at further gradual consolidation, albeit at a slower pace than targeted under the Fiscal Responsibility and Debt Limitation (FRDL) Act, and will likely require additional revenue measures in light of recent revenue underperformance.

The directors emphasised that sustained fiscal consolidation over the medium term was critical to strengthen economic resilience, safeguard fiscal sustainability and limit pressures on the current account and international reserves.

To this end, the directors recommended mobilising additional tax revenues by broadening the tax base and strengthening tax administration while enhancing the composition of public spending by containing the wage bill’s growth and electricity subsidies. They also recommended strengthening the national fiscal federalism framework and public debt management.

Published in Dawn, June 18th, 2017