External sector could see more difficulties, warns IMF

ISLAMABAD – The International Monetary Fund (IMF) on Thursday expressed concerned over external sector of Pakistan’s economy, which could see further difficulties ahead of next general election of 2018.

Political instability in Pakistan during last few months has decoupled the country from the economic development. “Pakistan is currently facing difficult time and it needs to maintain stability on external and fiscal sides,” said the IMF Mission Chief Harald Finger while addressing a press conference at the conclusion of post programme monitoring of $6.64 billion External Fund Facility (EFF).

Pakistan could not achieve the economic growth target of 6 percent, as it is estimated at 5.6 percent during ongoing financial year, he added. Finger warned that pre-election campaign could create difficulties for the economy, which is already under pressure. However, he hoped that government would ensure stability before general elections. “We do see continued pressure on external side and pressure on international reserves,” he added.

IMF Mission Chief welcomed the move of State Bank of Pakistan (SBP) to allow adjustment of exchange rate in recent days. Continued exchange rate flexibility in the period ahead will be important to facilitate externa1 adjustment in support of exports and economic growth. Alongside, fiscal discipline and an adequately tight monetary policy stance are needed to reverse the widening of external imbalances. However, he made it clear that the IMF has nothing to do with this and this is an independent policy decision.

Finger said that Pakistan has not asked for fresh IMF programme during current talks. Pakistan is currently facing difficult time and it can avert the situation by following right policies, including on exchange rate side and also including the efforts to contain the fiscal deficit, he replied to a query whether Pakistan will be able to manage external side without IMF after June 2018.

Finger emphasized on enhancing collection and broadening of tax base, which is very low from last many years. Tax to GDP ratio has the potential to go to 22 percent, which is currently 12 percent, he informed.

Talking about the latest IMF programme, the Fund mission chief said that government had successfully completed the programme by reducing the budget deficit and enhancing foreign exchange reserves of the country. However, he explained that all issues were not addressed in that programme especially structural reforms.

A handout given to the media after the briefing stated, “It has been a great pleasure for the mission to visit Pakistan and hold productive discussions in Islamabad for the first time in four years, which is reflective of the improved security situation in the country. The mission met with the Pakistan’s economic team, representatives of the business community, and academics. The mission would like to thank the authorities for their hospitality and constructive dialogue.

Handout further stated, “Strengthening the economy’s resilience will be important to maintain Pakistan’s favorable growth momentum and ensure sustainable private investment and job creation in the medium term. While economic growth has been accelerating and inflation remains subdued, Pakistan is facing important near-term economic challenges. Surging imports have led to a decline in international reserves despite higher external financing. The increase in the fiscal deficit last year has added to these trends. Inter-company arrears in the power sector continue to accumulate and need to be addressed decisively. While the authorities have taken steps to address these challenges, greater efforts are required to prevent a further build-up of vulnerabilities and preserve Pakistan’s hard-won macroeconomic stability.

“A strong reform effort is needed to maintain external stability, ensure debt sustainability, and support higher and more inclusive growth in the medium term. This includes pursuing medium-term fiscal consolidation driven by accelerated efforts to broaden the tax base, strengthening the monetary policy framework and autonomy of the SBP, careful phasing in of new external liabilities to contain external stability risks, eliminating the losses of public sector enterprises, improving the business climate, and continued strengthening of the financial sector. In parallel, continuing to strengthen mechanisms for protecting the most vulnerable will be critical to support inclusive growth. In this context, continued expansion of the Benazir Income Support Program will be important.”

Meanwhile, according to an official handout of ministry of finance, an International Monetary Fund (IMF) mission led by Harald Finger visited Pakistan from December 5th to 14th, 2017 for the first Post Program Monitoring (PPM) since the end of Extended Fund Facility (EFF) in September 2016.

The Fund mission held detailed technical discussions with senior officials in the Ministry of Finance and State Bank of Pakistan, beside Ministries of Energy, Planning Development and Reforms, Commerce, Privatisation, Railways, and Federal Board of Revenue, Board of Investment, NEPRA, OGRA, SECP. The Mission also held consultative session with academia, think tanks and bankers. Pakistan team was led by Shahid Mahmood, Secretary Finance, and Tariq Bajwa, Governor State Bank of Pakistan.

Discussions largely focused on the recent economic developments and its outlook. Deliberations were also held on reform efforts undertaken by the government including fiscal, monetary, financial, energy policies and strengthening investment climate. The Mission recognized that Pakistan growth momentum continues to be on a relatively high trajectory while inflation continues to remain low and stable, helped by supportive fiscal and monetary policies. Continued policy reforms are likely to contain external imbalances while supporting economic growth in the medium term.

The Mission also recognized notable improvements in foreign direct investment, pickup in exports and recovery in workers’ remittances. Furthermore, it also focused on addressing some of the vulnerabilities emanating from the higher level of imports and pressure on country’s foreign exchange reserves. However, the Mission welcomed the new policy actions to address these concerns.

The government reiterated its commitment to stay on path of fiscal consolidation supported by increase in FBR revenues and prudent expenditure management. The government also shared its commitment to continue with reform effort for public sector enterprises and protecting the vulnerable segments of the society.

The Mission was pleased to visit Pakistan after a gap of 4 years in improved secure environment. The Fund and Pakistan authorities will continue discussions during Article IV consultations tentatively scheduled for first half of 2018.

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