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Summary IMF has completed Article-IV consultation 2011 and review of Pakistan's economy.
The Executive Board of the International Monetary Fund (IMF) has concluded the 2011 Article-IV consultation and proposals for post-programme monitoring regarding Pakistans overall economic situation.Giving the current state of Pakistani economy, the IMF says that Pakistans economic performance has weakened and external pressures are mounting. In 2010/11, real GDP expanded by 2.4 percent—far below the estimated 7 percent required to absorb the two million new labor market entrants annually—with inflation persistently in double digits, it pointed out.Unemployment is high when underemployment and unpaid employment are taken into account, while poverty incidence and measures of human development are at worrisome levels, the report reads adding that the efforts to boost revenue mobilization were once again frustrated by a lack of political support, and the fiscal deficit widened to 6.6 percent of GDP in 2010/11.While the economy is recovering from the floods, the external position, until recently a source of strength on booming exports and workers’ remittances, is deteriorating. The rupee has come under some pressure, prompting State Bank of Pakistan (SBP) exchange market intervention. The SBP’s foreign exchange reserves have declined by about $2 billion in the last six months, the report outlines.Making predictions about Pakistans economy, based on the on-ground situation, IMF says that on current policies, Pakistan’s near- and medium-term prospects are challenging. Growth would remain too low to absorb the large number of new entrants into the labor force, inflation would remain high, and the external position would weaken further.Notwithstanding the official figures, IMF estimates that in 2011/12, real GDP growth is projected at 3.4 percent and average Consumer Price Index (CPI) inflation at 12 percent. Monetary policy has become more accommodative, with the SBP directly or indirectly (through liquidity injections via open market operations) financing fiscal deficits (which is likely to increase inflation), it argued.A deterioration in the current account balance due to lower cotton/textile prices and a sharp slowdown in remittances growth, continued difficulties in attracting external financing, and the beginning of repayments to the IMF will likely put further pressure on the balance of payments this year, with reserves projected at $12.1 billion by end 2011/12, the report mentions.In the absence of corrective measures, the fiscal deficit was likely to reach 7 percent of GDP, much higher than the government’s revised budget target of 4.7 percent. Moreover, there are considerable downside risks to this already difficult baseline, particularly in the context of an increasingly difficult global environment and concerns about policy weakening ahead of senate elections in 2012 and parliamentary elections in 2013, it informed.The report does take into account the background and difficulties faced by the Pakistani economy in the recent past, including external and domestic economic shocks, political uncertainty, and security problems. Despite these challenges, the economic policymakers have taken policy actions and implemented several reforms, including those under the recently expired Stand-By Arrangement with IMF, which helped the economy avoid a full-blown crisis in 2008/09, the report observed.These actions and reforms include establishment of an interest rate corridor, implementation of a more market-based exchange rate regime, and a strengthening of the enforcement powers of the State Bank of Pakistan (SBP). In addition, the authorities substantially raised electricity tariffs and domestic prices of the main petroleum products, and the Benazir Income Support Program (BISP) provided basic income support to the poor during the various shocks that have hit Pakistan.Despite the healthy economic outlook and steps taken last year, IMF does forewarn Pakistan about the imminent challenges. Unresolved structural problems (especially in the energy sector), two major floods, difficulties in implementing key policy reforms, and a more challenging global environment have combined to limit growth and employment creation and made the economy highly vulnerable, with few buffers to absorb shocks, the Fund suggests.The IMF Executive Board, that takes policy decisions regarding member countries, has assessed that Pakistan continues to fall short of its economic potential, and called for a reorientation of macroeconomic and structural policies to stem near-term risks to macroeconomic stability, and to lay the foundation for durable and inclusive growth over the medium term.In particular, merit in further broadening the tax base, restructuring public enterprises, eliminating poorly targeted subsidies, phasing out commodity procurement operations, strengthening the framework for fiscal devolution and the incentives for provincial governments to raise revenue were recommended.Monetary and exchange rate policies need to better focus on containing inflation and external risks. Monetary policy is now too accommodative, and should be tightened if inflation or external pressures increase, the IMF stated.Regarding SBP policies, the report says that central bank financing of the budget needs to be curtailed, and greater operational independence of the central bank needs to be secured. More exchange rate flexibility needed to facilitate external adjustment and safeguard foreign reserves.Rising non-performing loan ratios and other weaknesses in banks’ balance sheets present risks to financial stability. Stronger supervisory oversight, improved mechanisms needed for resolving problem banks, and the prompt establishment of a bank-financed deposit insurance scheme, the Fund says about the banking sector.The IMF Directors also urged the authorities to address long-standing deficiencies in the regulatory regimes against money laundering and terrorism financing. They said high priority should be attached to improving the business environment, boosting external competitiveness, and upgrading the power sector to remove its burden on the public finances and provide a reliable electricity supply to support growth.Later, addressing a press conference, IMF mission chief for Pakistan, Adnan Mazarei, conceded that Pakistans security problems and general economic health are a problem. External sector deteroriation and remittances are going down because of developments in international economy, he argued.He pointed out that cotton prices have come down drastically, and oil prices increasing which will put pressure on Pakistani economy. Demands for Pakistani prices are decreasing. He said that energy sector will remain struggling unless drastic structural changes are taken and only price increase will not be able to solve the problem.Commenting of the State Bank policies, he said the central bank had pumped a large amount of liquidity in markets, which will increase prices and will also have an impact on bank profits. It is quite correct to say that Pakistan economy is facing huge vulnerabilities and risks, he said when asked to remark on the countrys financial health.On a question about Pakistans expected revenues from granting 3G licenses, he said Pakistani authorities expect a maximum of 700-800 million dollars from 3G licenses, which will only bring budget deficit down to 6.6 percent.With current kind of growth rate, job creation was very difficult, he said adding that investment climate in Pakistan is not very good, and steps need to be taken to attarct it. Improving relations with India and WTO tariff exemptions for 75 items recently should help Pakistan in this regard, he emphasized.The re-payment of previous IMF loan will start this month (February), he said while adding, in response to another question, that Pakistani authorities had not requested any new loan. In the foreseeable future, pressure on rupee could continue, balance of payments are also affected by political situation in Pakistan, he concluded.-- Contributed by Awais Saleem, Dunya News correspondent in Washington, DC
