ISLAMABAD/ WASHINGTON - The International Monetary Fund (IMF) said the outlook for Pakistan's economy was "favourable", citing Chinese infrastructure investments among reasons for growth, but warned of risks to recent progress.

Confidence in insurgency-hit Pakistan is growing, with the IMF saying last year that the country had emerged from crisis and stabilised its economy after completing a bailout programme. However the IMF warned in a report that macroeconomic stability gains have started to erode and could pose risks to the economic outlook.

"Pakistan's outlook for economic growth is favourable, with real GDP estimated at 5.3 percent in ... 2016/17 and strengthening to 6 percent over the medium term on the back of stepped-up China Pakistan Economic Corridor investments, improved availability of energy, and growth-supporting structural reforms," the report said. "However, macroeconomic stability gains ... have begun to erode and could pose risks to the economic outlook," it added.

Prime Minister Nawaz Sharif vowed to boost the long-depressed economy after winning a third term in 2013. Encouraged -- and undeterred by domestic debt of $182 billion -- Islamabad set an ambitious yearly growth target of 5.7 percent for 2016/2017. The World Bank predicted 5.4 percent growth by 2018.

Hopes are pinned on the China-Pakistan Economic Corridor, a $46 billion initiative by Beijing that aims to link the Asian superpower's Xinjiang region with the Arabian Sea through Pakistan. The plan encompasses a series of infrastructure, power and transport upgrades that Islamabad hopes will kickstart the economy.

But experts say the deal is opaque, and much more transparency is needed before they can assess any impact for Pakistan -- including, for example, whether the $46 billion is an investment or a loan.

According to Friday's IMF report, Pakistan's current account deficit has widened and is expected at 3 percent of GDP in 2016-17 or more than $9 billion, driven by fast rising imports of capital goods and energy. It said Pakistan's foreign exchange reserves have declined in the context of a stable rupee-dollar exchange rate, urging Islamabad to allow greater exchange rate flexibility. Over the last two weeks, official foreign currency reserves decreased by more than $1.5 billion.

In a press release, the IMF released the details of the consultation with Pakistan. The report depicts a mostly bleak economic situation in Pakistan as opposed to the positive picture portrayed by government officials in Pakistan.

An important revelation in IMF’s report is that the government debt (as percentage of GDP) is 66.6 percent as opposed to the 59.3 percent as claimed by Federal Finance Minister Senator Ishaq Dar this week. The total debt as reported by IMF is over Rs 21.2 trillion while Ishaq Dar claimed it was Rs 18.9 trillion.

The IMF has revealed that the macroeconomic stability gains made between 2013-2016 have eroded and pose risks to the economic outlook of the country. Fiscal consolidation has slowed down, with the international agency reporting that the budget deficit target of 4.2 percent of Gross Domestic Product (GDP), set in the 2016/2017 budget is likely going to be exceeded.

Moreover, the current account deficit has widened and is expected to be 3 percent of GDP in 2016/17, driven by rapidly rising import of capital goods and energy. Foreign exchange reserves have reduced in the context of a stable rupee/dollar exchange rate. According to reports in media, in just past two weeks, the official foreign currency reserves decreased over $1.5 billion.

On the structural front, while the successful implementation of business climate and financial inclusion reforms has continued, some renewed accumulation of arrears in the power sector has been observed, and financial losses of ailing public sector enterprises continue to weigh on scarce fiscal resources.  Key external risks include lower trading partner growth, tighter international financial conditions, a faster rise in international oil prices, and over the medium term, failure to generate sufficient exports to meet rising external obligations from large-scale foreign-financed investments.

However, the IMF has reported Pakistan’s outlook for economic growth as favourable with real GDP estimated at 5.3 percent in fiscal year 2016/17 and strengthening to 6 percent over the medium term. This has resulted from China-Pakistan Economic Corridor (CPEC) investments, improved availability of energy, and structural reforms that support growth. Moreover, inflation has been gradually increasing but remains contained, and the financial sector has remained sound. IMF directors commended the Pakistani authorities for strengthening macroeconomic resilience during their 2013–16 Fund supported program. They agreed that the growth outlook remains favorable, but noted that policy implementation weakened recently and macroeconomic vulnerabilities are reemerging.

Against this backdrop, the Directors called on the authorities to safeguard the macroeconomic gains of recent years through continued implementation of sound policies, and to continue with structural reforms to achieve higher and more inclusive growth.

The Directors encouraged the authorities to strengthen fiscal consolidation. They noted that the FY 2017/18 budget aims at further gradual consolidation, albeit at a slower pace than targeted under the Fiscal Responsibility and Debt Limitation (FRDL) Act, and will likely require additional revenue measures in light of recent revenue underperformance.

They emphasized that sustained fiscal consolidation over the medium term, in line with the FRDL Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves. To this end, Directors recommended mobilizing additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies, and increasing priority social spending. They also recommended strengthening the national fiscal federalism framework and public debt management.

Directors stressed the importance of maintaining a prudent monetary policy stance to preserve low inflation. They noted that monetary policy has been appropriately accommodative, and urged the State Bank of Pakistan (SBP) to remain vigilant and be ready to tighten it in case inflationary pressures emerge or foreign exchange market pressures intensify. Directors called on the authorities to allow for greater exchange rate flexibility—rather than relying on administrative measures—to help reduce external imbalances and bolster external buffers.

In this regard, they welcomed the authorities’ commitment to remove, within one year, the cash margin requirement for imports of consumer goods, which constitutes an exchange restriction and multiple currency practice. Directors welcomed ongoing progress in strengthening central bank autonomy, and called for implementing the remaining recommendations from the 2013 Safeguards Assessment and to phase out government borrowing from SBP. Directors saw many of the abovementioned measures as preconditions for moving to an inflation targeting regime in the medium term.

Directors underscored the importance of further advancing financial sector reforms to continue strengthening resilience and support financial deepening. They welcomed efforts to bring undercapitalized banks into regulatory compliance, further strengthen the regulatory and supervisory frameworks, address non performing loans, and enhance the AML/CFT framework. Directors looked forward to the operationalization of the new deposit insurance.

Directors stressed that further progress in the structural reform agenda is needed to make growth more inclusive and reduce poverty. They welcomed the progress in fostering financial inclusion and implementing the business climate reform strategy, and encouraged the authorities to press ahead with these efforts.

Directors also recommended further strengthening social safety nets. They called for maintaining a strong regulatory framework in the energy sector, swiftly addressing the renewed build up of arrears in the sector, and ensuring its financial soundness. Directors noted that restructuring and attracting private sector participation in public enterprises as well as improving their governance will ensure their financial viability and economic efficiency while reducing fiscal risks.