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.