IMF projects stagflation, 3.5pc GDP growth

ISLAMABAD: The International Monetary Fund (IMF) has projected “stagflation” for Pakistan with a low GDP growth rate of 3.5 per cent and higher average inflation of 19.9 per cent for the current fiscal year.

With this prescription, unemployment and poverty are bound to rise in Pakistan under the stringent nose of IMF conditions. There is no recipe available for the country to come out of the IMF programme after the expiry of the existing one in June 2023. The country will need another IMF programme if the foreign exchange reserves could not boost up to $16.2 billion by the end of June 2023.

In order to fulfil the IMF requirements, Pakistan requires to generate $41 billion in the current fiscal year to bridge external financing needs as well as shoring up foreign exchange reserves to create a buffer for facing any unwarranted external shocks. Independent economists expressed their fears that if the foreign exchange reserves could not be increased up to $16.2 billion by end of the ongoing fiscal year then the need for another IMF programme will be knocking at our doors in the next fiscal year 2023-24 when there will be fresh general elections and the new government will be elected by securing mandate.

The revival of the IMF programme folded some highly ambitious targets such as raising the dwindling gross foreign exchange reserves as the State Bank of Pakistan (SBP) was given a target to jack up the reserves from the existing level of $7.8 billion to $16.2 billion, indicating a requirement to achieve an increase by $8.4 billion in reserves position till end June 2023.

Although, the IMF stalled programme under Extended Fund Facility (EFF) was revived back after seven months but the size of the programme was also augmented up to $6.5 billion and the timeframe was also extended from September 2022 to June 2023.

Independent economists have termed IMF’s projections as a sign of “stagflation” whereas the Fund revised downward the GDP growth target from 6 per cent in the last fiscal year to 3.5 per cent for the current fiscal year. The IMF had made these projections prior to the recent ‘super floods’ that further diminished the prospects of GDP growth for the current financial year. On other hand, the IMF revised the inflation target upward to 19.9 per cent while it assessed that the CPI-based inflation was projected to hover around 15 per cent in June 2023. Pakistan’s official projection of inflation was hovering around 11.5 per cent for the current fiscal year. However, the State Bank of Pakistan (SBP) envisaged CPI-based inflation in the range of 19 to 20 per cent on average in the current fiscal year.

Secondly, the IMF programme envisages jacking up foreign currency reserves by $8.4 billion increasing from $7.8 billion to $16.2 billion by June 2023. The IMF has envisaged that the current account deficit would be standing at negative 2.5 per cent of GDP, equivalent to approximately $9 billion for the current fiscal year.

Pakistan’s foreign debt servicing requirements stood at $22.9 billion for the current fiscal year and the current account deficit was estimated at $9 billion so the foreign financing requirement escalated to $33 billion. Now it will be a major challenge for the Ministry of Finance and SBP for raising an additional $8.4 billion over and above $33 billion to jack up the foreign exchange reserves to $16.2 billion by end of the ongoing financial year.

Total external requirements stand at $41 billion for the current fiscal year and it will not be an easy task. Although the multilateral and bilateral creditors assured extending all-out support to Islamabad under the IMF agreement but making this commitment a reality will require putting an act together otherwise it will remain just a dream.

Finally, the word structural reform was used only once in the Fund’s press release which clearly indicates that the focus of the IMF-sponsored programme was on patchwork so no attention was given to removing bottlenecks to achieve agriculture and industrial productivity and compositeness by removing distortions. There is no focus on boosting savings and investment as well as exports to come out from the IMF programme on a sustained and long-term basis.