IMF warns Pakistan’s economy ‘vulnerable'

ISLAMABAD: The International Monetary Fund (IMF) has warned Pakistan that its economy remains vulnerable owing to an elevated risk of delayed implementation of structural reforms and widening imbalances on external accounts.

The Fund also stressed the need to maintain momentum on the reform of Personal Income Tax (PIT). The IMF has clearly demanded jacking up slabs and rates of PIT, which was resisted by the finance minister on the eve of the last budget 2021-22 but it seems that the Fund wanted implementation on it in the next budget for 2022-23 before the end of the Fund-sponsored Extended Fund Facility (EFF) programme in coming September 2022. Only two reviews are pending; the seventh review under the EFF is expected to be done in April 2022 while the eighth review would be accomplished following the announcement of the budget 2022-23.

The Fund also projected the real GDP growth at 4 The IMF had given its forecast that inflation will be standing at 9.4 percent. The general government and government-guaranteed debt is estimated to climb to 86.7 per cent of GDP during the current fiscal year. It is worth mentioning here that the government approved rebasing of national accounts and estimated that the GDP growth stood at 5.37 percent for the last fiscal year against provisional estimates of 3.94 percent. The size of the GDP also escalated in rupee and dollar terms and stood at Rs55.5 trillion and $347 billion respectively.

According to the IMF’s official announcement made on Thursday, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation and the Sixth Review of the extended arrangement under the Extended Fund Facility (EFF) for Pakistan. The completion of the review allows the authorities to draw the equivalent of SDR 750 million (about US$1 billion), bringing total purchases for budget support under the programme to SDR 2,144 million (about US$3 billion or 106 per cent of quota).

The EFF was approved by the Executive Board on July 3, 2019 for SDR 4,268 million (about US$6 billion at the time of approval or 210 per cent of quota). The programme aims to support Pakistan's policies to help economic recovery from the COVID-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Pakistan entered the COVID-19 pandemic with strengthened buffers, following the approved EFF program. A strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock. At the same time, external pressures also started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate, which also reinforced domestic price pressures.

The recent policy adjustment was appropriate to address these challenges and maintain economic stability. The economy is set to continue recovering in FY2022, with real GDP growth projected at 4 per cent, while inflation is expected to pick up this year before gradually slowing down. Continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term.

However, Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms. Strengthening the medium-term outlook hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy. To this end, increased focus is needed on measures to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change.

The Executive Board also approved the authorities' request for waivers of applicability and non-observance of performance criteria. Following the Executive Board's discussion on Pakistan, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement: "The Pakistani economy has continued to recover despite the challenges from the COVID-19 pandemic, but imbalances have widened and risks remain elevated. The authorities' recent policy efforts to strengthen economic resilience are welcomed. Timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth.

"The authorities have taken important measures to strengthen fiscal policy and put public finances on a sounder footing. Along with careful spending management, revenue mobilization will help to create space for much-needed spending on infrastructure and social protection, while improving debt sustainability. Maintaining the momentum on the reform of personal income taxation and harmonization of general sales taxes is essential. Broader reforms in tax administration and public financial and debt management are expected to further improve the fiscal framework.

"The adoption of amendments to the central bank Act is a welcome step toward strengthening its independence to pursue its mandates of price and financial stability. The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy would help to anchor inflation. Closer oversight of financial institutions to ensure they remain well capitalized would help to maintain financial stability. Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild reserves. The authorities are committed to removing the existing exchange restrictions and multiple currency practices when BOP conditions stabilize.

"Strong efforts to advance electricity sector reform are needed to restore the sector's financial viability and address adverse spillovers on the budget, financial sector, and real economy. The IFI-supported Circular Debt Management Plan (CDMP) will help to guide the planned management improvements, cost reductions, alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.

"Ambitious steps to remove structural impediments and facilitate structural transformation remain essential to boost growth and job creation and improve social outcomes. The authorities are focused on state-owned enterprises reform, fostering the business environment and reducing corruption, promoting financial inclusion; and addressing the challenges posed by climate change."