Amid a hyperactive prime minister taking charge, independent institutions have an almost consensus on two things — Pakistan’s economic growth this year would be around 4 per cent but a populist relief package including fuel subsidies announced by former prime minister Khan and its continuation could threaten the International Monetary Fund (IMF) programme so direly needed for the balance of payment support.

New Prime Minister Shehbaz Sharif did not change course on fuel subsidy at the first opportunity he came across even though his party colleagues had lambasted the previous government for ‘explosive landmines’ and cruel, careless and wrong decisions. The World Bank shared these sentiments earlier this week when it called fuel subsidies “unsustainable and ineffective” and called for taking a corrective path.

The World Bank scaled down Pakistan’s GDP growth rate to 4.3pc — down 0.9pc from its previous estimate in January — compared to 5.6pc actual growth last fiscal year. It put the growth estimate for next year even on the lower side at 4pc. In January, the bank had put Pakistan’s GDP growth at 5.2pc which has since been changed. This comes amid monetary tightening measures that began in September 2021, high base effects from the previous year and continued high inflation eroding real private consumption growth.

It said the energy subsidies introduced by the PTI government put an additional burden on the budget and threaten the IMF programme. “The financing of the price cuts or subsidies can create an additional burden on the fiscal budget, threaten the ongoing program with the IMF and limit the use of the fiscal budget on other, more productive projects,” said the World Bank ahead of the IMF-WB Annual Spring Meetings beginning today.

High prices of imported food and energy products will widen the trade deficit, worsen external imbalances and exert pressure on the local currency, undermining fiscal consolidation

The bank said Pakistan had earlier followed its agreement with the IMF to remove tax exemptions and increase the tax on fuels. But rising energy prices domestically and challenges from political opposition forced the government to offer electricity and fuel price relief in February. “While these measures can help reduce fluctuations in domestic prices, they also constitute a direct burden or hidden liability on the government’s budget, which could increase fiscal vulnerabilities going forward”.

The Asian Development Bank (ADB) also forecast Pakistan’s economic growth slowing down to 4pc this year and inflation rising owing to tighter fiscal and monetary policies and the Russia-Ukraine war fallout. In contrast to the World Bank though, the Manila-based lender expected a relatively higher growth rate of 4.5pc next year.

“Pakistan’s growth is forecast moderating to 4pc in 2022 on weaker domestic demand from monetary tightening and fiscal consolidation before picking up to 4.5pc in 2023,” ADB said. Pakistan has a GDP growth rate target of 4.8pc for the current fiscal year.

Interestingly though, the ADB forecast is based on the revival of the IMF programme in January this year for fiscal and monetary tightening — a part of which had already been undone by the end of February by the PTI government. The bank said, “slower growth in the current fiscal year reflects the government reactivating its stabilisation programme under the IMF Extended Fund Facility to narrow the current account deficit, raise international reserves and cut inflation”.

Because Pakistan is a net importer of oil and natural gas, with both comprising almost 20pc of total imports, the country will continue experiencing strong inflationary pressure for the rest of the current fiscal year from the jump in global fuel prices related to the Russian invasion of Ukraine. High prices of imported food and energy products will widen the trade deficit, worsening external imbalances and exerting pressure on the local currency. A larger than projected current account deficit and a weaker Pakistan rupee will undermine fiscal consolidation, according to ADB.

While commenting on the political change, Moody’s investor service also highlighted Pakistan’s significant uncertainty over policy continuity and falling foreign exchange reserves while projecting the GDP growth rate within a 3-4pc band. It said, “the political upheaval reflects the volatility that besets Pakistan’s political environment and raises significant uncertainty over policy continuity at a time when Pakistan is encumbered with surging inflation, widening current account deficits and declining foreign-exchange reserves.”

It said it was unclear how the new government will approach the IMF programme during this interim period before the next election is called, prolonging the uncertainty around whether Pakistan will be able to secure financing from the IMF to bolster its foreign-exchange reserves, which have fallen to a level sufficient to cover only about two months of imports. It linked growth forecasts to expectations of a reform agenda and the China-Pakistan Economic Corridor boosting economic growth.

Likewise, another top rating agency, New York-based Fitch Rating also forecast growth at 4pc this year and highlighted fuel subsidies as key complications to the IMF programme and asked the new government to clear policy uncertainties rather quickly to address near term balance of payment and fiscal challenges.

It noted that negotiations around key revenue-raising reforms could prove lengthy, particularly as the government was a broad coalition of disparate political parties. “New fuel subsidies introduced in March as part of efforts to restrain inflation have already added to the complications facing programme negotiations and medium-term fiscal consolidation,” it said.

Fitch expected the current account deficit to rise to $18.5 billion by the end of the year or 5pc of GDP owing to the oil price shock, thus adding to already high gross external financing needs from an elevated debt-repayment schedule. This is in line with Miftah Ismail’s claims of current account deficit and fiscal deficit for the year at $20bn and Rs6.4trillion, respectively. He has already started engagements with the IMF and the World Bank for the revival of the fund programme.

The World Bank is the key player in the fund programme, particularly in terms of the energy sector’s circular debt management plan which also appears in the doldrums due to a Rs5 per unit cut in its tariff for four months with an estimated revenue loss of about Rs136bn through the end of June. The completion of the 7th review with the IMF had come to a deadlock last month owing mainly to three factors — increased subsidies on fuel and electricity and a tax amnesty scheme for industries.

Published in Dawn, The Business and Finance Weekly, April 18th, 2022

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