Pakistan made progress towards financial stability: Shamshad.

ISLAMABAD  -  The International Mon­etary Fund (IMF) has acknowledged that Paki­stan’s economic activity has stabilised and infla­tion has begun to gradu­ally decline on the back of strong policy adjustment.

In its country report on Pakistan, the inter­national lender said that external pressures have eased somewhat since June last year and the State Bank of Paki­stan has taken advan­tage of renewed inflows to begin rebuilding for­eign exchange reserves.

The IMF report further states that Pakistan’s fiscal per­formance has also im­proved with the gov­ernment achieving a primary surplus in the first quarter of this fis­cal year. Welcoming this progress, the IMF warned that the outlook is still challenging.

The IMF has projected Pakistan’s economic growth at 2.0 percent in FY24 (from earlier 2.5 percent) as demand re­mains weak, economic activity is picking up, although gradually, and inflation has started to decline, though remain­ing elevated. The IMF has acknowledged Paki­stan’s progress while emphasizing the need for sustained reforms to tackle structural challenges. In its report after first economic re­view under Stand-By Arrangement, the IMF has noted that external pressures have eased somewhat, and the SBP has taken advantage of inflows to begin rebuild­ing FX buffers. Fiscal performance has also improved, with the gen­eral government regis­tering a primary surplus in first quarter (July to September) of current financial year (FY24). While the current SBA has provided a much-needed respite, and the caretaker gov­ernment deserves credit for its steadfast implementation, Paki­stan’s medium term challenges remain acute, and the current policy efforts need to continue to address them in a sustainable manner. The government has as­sured for timely notifications of increasing power and gas tariffs. At end-September 2023, the gov­ernment had met six quantitative Performance Criteria (PCs): the floors on: (i) net international re­serves of the SBP; and (ii) targeted cash transfers spending (BISP); and the ceilings on: (iii) the SBP’s FX swap/forward book; (iv) net domestic assets of the SBP; (v) net government budgetary borrowing from the SBP; and (vi) the amount of government guarantees. They also met the two continuous PCs on: (i) zero new flow of SBP credit to the government; and (ii) zero external public payment arrears. The ceiling on the general govern­ment primary budget deficit was missed by a small margin, with this deviation accounted for by technical factors.

The government three end-Sep­tember Indicative targets (ITs): the floors (i) on net tax revenue collected by FBR; and (ii) budget­ary health and education spend­ing; and the ceiling on (iii) net ac­cumulation of tax refund arrears. However, the IT on power sector payment arrears was missed by a large margin, mostly due to un­der-recoveries in August as well as a lower-than anticipated tariff set in the annual rebasing. 

The structural benchmarks (SBs) on the notification of the FY24 annual rebasing, and the compilation and dissemination of quarterly national accounts were met. The continuous SB on the av­erage premium between the inter­bank and open market exchange rate was missed from mid-August to early-September, but subse­quent structural reforms in the EC sector should enhance governance and transparency and reduce the risk of future deviations. Strong progress was made on the end-No­vember SB on improving SOE gov­ernance, including (i) the opera­tionalization of the SOE Act into a policy that clarifies ownership ar­rangements and roles; and (ii) sig­nificant progress, via ordinance, on amending the Acts of four se­lected SOEs to make the new SOE Act fully applicable, although final amendments remain to be com­pleted via updated ordinance and/or adopted by parliament.

Strengthening revenue collec­tion to ensure alignment with the FY24 budget. To achieve this the FBR has commenced bringing nine hundred thousand identified non-filers into the tax net. The FBR will issue initial notifications to these taxpayers by mid-December and has established a monitoring sys­tem to track the yield of this op­eration, with corrective measures planned should collections fall short. Further reforms to enhance revenue administration, including anti smuggling efforts and close monitoring of the track and trace system are also underway. Finally, should revenue fall short in FY24, the authorities have identified sev­eral contingent measures which can be adopted. Containing prima­ry expenditure to PRs 12,915 bil­lion (11.9 percent of GDP) while preserving space for priority so­cial spending Salary and pension increases will be restricted to the allocated budget of the respective entities and, within this envelope, the generosity of the BISP uncon­ditional cash transfer (UCT) Ka­faalat will be protected. Energy subsidies are also limited to PRs 976 billion as per the budget.

The government measures to safeguard the FY24 primary sur­plus target are welcome, but fur­ther fiscal reforms remain es­sential to reduce debt to more sustainable levels. Strict adher­ence to the budget is necessary to mitigate significant risks to mac­roeconomic stability and fiscal sustainability. Future revenue mo­bilization efforts should focus on improving revenue administra­tion, ensuring proper tax policy implementation, and expanding the base through measures target­ing under-taxed sectors. In paral­lel, while safeguarding social as­sistance, non priority spending will need to be curtailed and proj­ects prioritized. In this regard, en­hancing public financial manage­ment is critical for optimizing the efficiency of scarce resources.

Restoring public confidence in the exchange rate system and deepening the FX market will re­quire allowing price signals to function without impediment and decisively abandoning tight man­agement of the FX market

Recent electricity and natural gas tariff increases demonstrat­ed the caretaker government’s willingness to take bold steps to shore-up energy sector viability. It is critical that the authorities con­tinue to implement tariff adjust­ments on time, while maintaining a progressive structure to pro­tect the most vulnerable house­holds. Swift movement is needed on broader reforms to reduce op­erational inefficiencies, improve performance, and reduce distor­tions that combine to continue to add pressure on CD flows.

Risks remain exceptionally high and tilted to the downside. Ex­ternal headwinds remain strong with tight global financial condi­tions, volatile food and fuel pric­es, and geopolitical tensions, in­cluding due to the conflict in Gaza and Israel. Wavering reform ef­forts could undermine the adjust­ment effort, put pressure on the exchange rate, and affect the avail­ability of external financing.

According to the report, the coun­try’s foreign exchange reserves have seen a significant increase, jumping from $4.5 billion in July 2023 to $8.2 billion currently. This rise in reserves indicates improved financial stability and potential for future debt servicing. The agricul­ture sector is performing slightly better, as it is growing at a rate of 5.1%. Dollar smuggling across Pak­istani borders, a major drain on the national economy, has been effec­tively controlled, marking a pos­itive step towards stabilizing the currency and foreign reserves.

Balancing budget targets with so­cial spending to alleviate the burden on vulnerable populations will be a crucial challenge for policymakers. The budget deficit is expected to be 7.6% of GDP this fiscal year, the IMF said, a figure that was last fiscal year 7.7%. Current Account Deficit: The potential increase in the current ac­count deficit to 1.6% of GDP this year needs to be closely monitored and managed to avoid external im­balances. Last fiscal year, Pakistan’s current account deficit was 0.7% of the GDP. Caretaker Finance Minis­ter Shamshad Akhtar has said de­spite challenges, Pakistan has made significant progress towards mac­ro-economic, exchange rate and fi­nancial stability.

Virtually addressing an IPO summit, she said growth is to re­bound in the positive trajectory in the range of two to two and a half percent with agriculture ex­pected to grow by five point six percent and industry by two and a half percent during the current fiscal year. The Finance Minister said the capital markets cannot thrive under very high interest rate regime. She said the State Bank of Pakistan is conscious of the fact that we will have to move to lower the interest rate subject to inflation coming down. She said foundation has been laid for attracting foreign direct invest­ment. Shamshad Akhtar said economic recovery process has bolstered business confidence and market sentiments. Pakistan Stock Market Index exhibited bullish momentum over the last five months.