ISLAMABAD: The International Monetary Fund (IMF) on Wednesday expressed concern over Pakistan’s weakening macroeconomic situation, including widening external and fiscal imbalances, reduction in foreign exchange reserves and emerging risks to economic and financial outlook.

The IMF executive board asked the government to immediately refocus on near-term policies to preserve macroeconomic stability and get back to fiscal discipline shown under the three-year $6.64 billion multi-tranche Extended Fund Facility (EFF) to minimise risks and economic distortions.

In its first post-programme monitoring (PPM) after the completion of fund programme in September last year, the IMF board also raised questions over the medium-term debt sustainability and called for additional revenue measures and containing expenditures.

The board expressed its anxiety over the deteriorating assessment that the country’s fiscal deficit was set to hit 5.5 per cent of GDP — almost Rs505bn or 1.4pc — higher than 4.1pc budgeted by the government and current account deficit to touch 4.8pc of GDP with the economic growth rate staying conservative at 5.6pc instead of budgeted 6pc.

Real GDP estimated to grow by 5.6pc due to improved power supply, CPEC-related investment

The IMF said the near-term economic growth outlook was broadly favourable but “continued erosion of macroeconomic resilience could put this outlook at risk”. Therefore, “Directors also emphasised the need for prudent debt management and caution in phasing in new external liabilities, and the urgency of tackling rising fiscal risks stemming from continued losses in public sector enterprises”, the IMF said in a statement issued two days after the executive board meeting that took place on March 5 in Washington.

The IMF said that real GDP was estimated to grow by 5.6pc during the fiscal year 2017-18 due to improved power supply, investment related to the China-Pakistan Economic Corridor (CPEC), strong consumption growth and ongoing recovery in agriculture. Inflation has remained contained and is estimated at 5.4pc.

Following significant fiscal slippages last year and current year deficit estimated at 5.5pc of GDP, with risks towards a higher deficit ahead of upcoming general elections, surging imports have led to a widening current account deficit and a significant decline in international reserves despite higher external financing.

The IMF noted gross international reserves further declining in a context of limited exchange rate flexibility. Against the backdrop of rising external and fiscal financing needs and declining reserves, “risks to Pakistan’s medium-term capacity to repay the Fund have increased since completion of the EFF arrangement in September 2016”.

The board directors welcomed move to allow some exchange rate adjustment last December, but stressed the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness. They also encouraged the authorities to phase out administrative measures aimed at supporting the balance of payments as soon as conditions allow them to minimise potential economic distortions.

The executive board noted that the external sector pressures were in part linked to the fiscal deterioration during the last fiscal year and an accommodative monetary policy stance, as well as high imports related to the CPEC projects.

The directors called upon the authorities to “strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while protecting pro-poor spending”, and emphasised that complementing the recent increase in the policy interest rate with further monetary tightening would be important to address inflationary risks and help reverse external imbalances.

The directors underscored the importance of accelerating structural reforms to reinforce macroeconomic stability, raise competitiveness and promote higher and more inclusive growth.

In the aftermath of recent setback at the Financial Action Task Force, the IMF board called for further enhancing anti-money laundering/counter-terror financing regime and strengthening the fiscal federalism and monetary and financial policy frameworks. The IMF also advised the authorities to improve the business climate, continue to strengthen governance, achieve cost recovery in the energy sector and expand social safety nets to protect the most vulnerable.

Because of substantially higher credit outstanding from the IMF, the borrowing members have to face closer monitoring of the policies under the PPM and undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability.

Published in Dawn, March 8th, 2018



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