IMF's warn­ing

The Pak Banker - - FRONT PAGE -

The In­ter­na­tional Mon­e­tary Fund has is­sued a new warn­ing, say­ing that the govern­ment of Pak­istan has frit­tered away the fruits of its three-year fund pro­gramme un­der which re­serves were at an all-time high, growth was gain­ing mo­men­tum, and in­fla­tion was sub­dued. But Pak­istan lost that mo­ment of op­por­tu­nity after ex­ist­ing the IMF pro­gramme. Last week, fol­low­ing its first post-pro­gramme mon­i­tor­ing (PPM) after the com­ple­tion of fund pro­gramme in Septem­ber last year, the In­ter­na­tional Mon­e­tary Fund 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 has 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. The IMF board has 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.

The IMF has pointed out that the near-term eco­nomic growth out­look was broadly favourable but "con­tin­ued ero­sion of macroe­co­nomic re­silience could put this out­look at risk". There­fore, it also 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. 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. Alarm­ingly, 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.

In the over­all con­text, the IMF board di­rec­tors wel­comed the 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. Need­less to say, the ex­ter­nal sec­tor pres­sures are in part linked to the fis­cal de­te­ri­o­ra­tion dur­ing the last year and an ac­com­moda­tive mon­e­tary pol­icy stance, as well as high im­ports re­lated to the CPEC projects. In this sit­u­a­tion, the govern­ment will need to strengthen fis­cal dis­ci­pline through ad­di­tional rev­enue mea­sures and ef­forts to con­tain cur­rent ex­pen­di­ture while pro­tect­ing pro-poor spend­ing and com­ple­ment­ing the re­cent in­crease in the pol­icy in­ter­est rate with fur­ther mon­e­tary tight­en­ing.

The govern­ment will also have to take steps 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. Clearly, as per IMF's ad­vice, the govern­ment needs to ur­gently fo­cus on short-term mea­sures to con­tain the de­te­ri­o­ra­tion in the ex­ter­nal and the fis­cal ac­counts. Given that the year ahead is an elec­tion year which will see an in­terim govern­ment come and go, with an elec­tion in be­tween, fol­lowed by the ar­rival of a new govern­ment, it will prove to be an in­creas­ingly dif­fi­cult task to man­age the grow­ing eco­nomic im­bal­ances.

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