ISLAMABAD - The International Monetary Fund (IMF) warned on Tuesday that Pakistan would experience greater exchange rate deprecation that would fuel the inflation rate in the country, which is already moving to the double digits figures.

According to the IMF “World Economic and Financial Surveys” Regional Economic Outlook: Middle East and Central Asia, lower capital inflows would erode reserves in Pakistan. Pakistan would experience greater exchange rate depreciation, despite likely increases in foreign aid. The exchange rate depreciation would fuel inflation in the country.

It is worth mentioning here that inflation rate has accelerated to 9.1 percent in the month of October, which is likely to further enhance as warned by the Fund. Similarly, the country is witnessing sharp rupee depreciation against the US dollar, as value of one dollar reached to Rs 108, which was Rs 100 when the incumbent government took charge in June 2013.

Meanwhile, IMF further said that Pakistan’s growth rate could remain at 2.75 percent during the current fiscal year 2013-2014, while the high expenditure and low income could result in the financial deficit to gross domestic product at 5.5 percent. The Fund further projected consumer price inflation at 7.9 percent by 2014. According to the survey reserves remain strikingly low in Pakistan and are vulnerable to the realisation of downside risks. The current account deficit for Pakistan is projected at 0.6 percent by 2014. 

According to IMF, the economic reforms prospects are uncertain and difficult in Pakistan given the challenge of building strong public consensus. Newly formed government of Pakistan has the multiyear horizon needed to enact reforms for growth and employment; but, reform prospects are uncertain, given the challenge of building strong public consensus for difficult economic reforms activity. Weak confidence undermines domestic economic activity. Across the region, investment is restrained, deterred by socio-political uncertainties, lack of a credible medium-term policy agenda, and in Egypt, Lebanon and Pakistan electricity supply disruptions.

The Fund warned that in Pakistan, underlying political and social tensions could prompt a surge in domestic sectarian violence.

The report further states that sustained large fiscal deficits have augmented already high debt ratios (Egypt, Jordan, Lebanon, Mauritania, Sudan) and raised susceptibility to shocks in those countries in which debt ratios were moderate (Morocco, Pakistan, Tunisia). These higher ratios have been largely the result of increases in generalised subsidies and public wage bills since 2011 that were intended to soothe political and social unrest and ease the burden of elevated international food and fuel prices. Low tax revenues and sometimes large quasi-fiscal activities have compounded pressures on deficits and debt. In many cases, reliance on domestic banks for financing runs the risk of reducing the availability of credit for the private sector. In other cases, monetisation of deficits is creating inflationary pressures.

The Fund further states that implementation of fiscal consolidation in the current socioeconomic environment is challenging. After the region’s deficits peaked in 2013, national policymakers expect to bring deficits down in 2014 (Afghanistan, Jordan, Morocco, Pakistan, Sudan, Tunisia) by improving revenue collection and, in some cases, further phasing out energy subsidies. Recent IMF arrangements in Jordan, Morocco, Pakistan, and Tunisia aim to achieve these goals. However, if financing is absorbed without formulating medium-term reform plans, including plans for maintaining fiscal and external debt sustainability, it would only delay the inevitable unwinding of the underlying imbalances and require a larger and more painful adjustment in the future, when financial support may not be forthcoming.