The International Monetary Fund (IMF) on Saturday increased Pakistan’s economic growth forecast to 3.2% and cut inflation projection to a single digit amid caution by its executive board that ambitious growth targets should not be chased at the expense of debt sustainability.
The IMF executive directors have also emphasised the need for effective communication to build broad consensus and support for reforms. The lender has released a detailed press statement three days after approval of a $7 billion loan package, acknowledging improvements in Pakistan’s economic conditions. “(Economic) growth has returned, external pressures have eased with reserves doubling over the last year, and inflation has declined markedly,” said Kenji Okamura, Deputy Managing Director of the IMF.
Okamura said that despite the progress on easing external pressures and inflation, significant structural challenges remained and ambitious and sustained efforts were needed to strengthen Pakistan’s resilience and economic prospects.
The IMF executive board concluded the 2024 Article IV consultation on Pakistan and approved a 37-month Extended Arrangement worth $7 billion. Pakistan received the first tranche of $1.02 billion on Friday. The IMF has projected Pakistan’s economic growth rate at 3.2%, which is better than the Asian Development Bank’s (ADB) forecast. The government has set the growth target at 3.5% for this fiscal year.
The IMF expects the average inflation rate to recede to 9.5% by the end of current fiscal year, which is far better than the government’s target of 12%.
The 9.5% projection is also significantly lower than the IMF’s earlier forecast of 15% inflation for this fiscal year. The ADB this week projected 15% inflation for Pakistan.
The single-digit inflation projection provides significant room to the State Bank of Pakistan (SBP) to further reduce its policy rate that currently stands at 17.5%.
The IMF executive board directors have also advised caution. “Some directors noted that given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability,” said the statement.
Debt sustainability remains the key concern as the IMF has projected an increase in the debt-to-GDP (gross domestic product) ratio during the current fiscal year.
It stated that the general government debt may increase from 69.2% to 71.4% of GDP. This is despite the fact that the IMF has set the primary budget surplus target of 2% of GDP.
The public and publicly guaranteed debt is projected to rise from 73% to 75.1% of the total size of economy.
The executive board directors have welcomed the steps taken towards a fairer tax system but stressed the importance of additional revenue mobilisation efforts by broadening the tax base and enhancing tax administration.
They have commended Pakistan for strengthening policymaking over the past year under the standby arrangement (SBA), which has delivered renewed economic stability.
“Noting the still high risks and narrow path to sustained stability, directors urged continued strong commitment and ownership of sound policies and structural reforms under the Extended Arrangement to create the conditions for durable and inclusive growth and to put debt firmly on a downward trajectory,” said the statement. The IMF has projected that the gross official foreign exchange reserves will rise from $9.4 billion to $12.8 billion by June next year. This is still below the minimum requirement equal to three months of imports.
The directors have emphasised the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves. The rupee remains stable at Rs279 to a dollar and some people in the government have started talking about a gradual devaluation to keep exports competitive. The directors further emphasised, in particular, the criticality of sustained programme implementation, supported by capacity development and close collaboration with development partners, to mobilise additional financing and restore market access.
They stressed the importance of vigilant monitoring of programme implementation, close consultation with the executive board, and robust contingency planning to safeguard the programme’s success. They noted that Pakistan needed to move away from its state-led growth model, strengthen business environment, and ensure a more even playing field with freer competition to reverse the decline in living standards.
The IMF said that Pakistan had taken key steps to restore economic stability with consistent policy implementation under the last SBA. Growth has rebounded and supported by activity in agriculture, while inflation has receded significantly, falling to single digits, amid appropriately tight fiscal and monetary policies. A contained current account and calm foreign exchange market conditions have allowed the rebuilding of reserve buffers, said the global lender.
The IMF’s new programme is aimed at rebuilding policymaking credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and the broadening of tax base.
The IMF deputy managing director called for increasing revenue mobilisation by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on the previously under-taxed sectors including industrialists, developers, and large-scale agriculture.
He said that timely energy tariff adjustments under the previous programme helped stabilise the energy sector circular debt. Going forward, deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its cost – a statement indicating the IMF’s longstanding demand to reopen the energy contracts with China.
The deputy managing director said that reform priorities included advancing the SOE reform agenda, scaling back distortive incentives, promoting a level playing field for all business, strengthening governance and anti-corruption institutions, and continuing to build climate resilience.
