Post-SBA policy prescription

IMF’s latest Public Information Notice on the post 2008 stand-by agreement with Pakistan should ring alarm bells for policymakers in Islamabad. It reiterates what followers of the economy already know, but comes with a caveat that the Fund’s not too pleased with how things have fared so far.
The Fund laments how the average rate of real GDP growth over the past four years has been a mere three percent, with a projection of a paltry 3.25 percent for FY13 – not enough to absorb the rapidly rising population and labor force of the country.
Problems in the energy sector, the weak external account situation of dwindling exports and a deteriorating financial account, the FY12 fiscal deficit of 8.5 percent reflecting revenue and expenditure slippages, accommodative monetary policy, SBP’s direct lending to the government, diversion of credit from the private sector are some oft-highlighted issues the IMF points out.
While acknowledging that some progress has been made, the IMF calls for ‘strong policy measures and deeper reforms’ for such a flailing economy, especially in the wake of the uncertain global environment.
No prizes for guessing what’s the one thing that the Fund believes needs to be particularly addressed in order to restore macroeconomic and external stability – reducing the large fiscal deficit. IMF suggests measures on both the revenue and expenditure side, such as broadening key taxes on one hand, and reducing subsidies on the other.
In addition, greater compliance is called for, as is some reconsideration into the mooted tax amnesty schedule.
What about the VAT that had been the core conditionality for Pakistan? Observing the political difficulty of imposing it, the IMF suggests alternate measures such as a modified GST and strengthening the income tax.
That monetary policy alone should not be aimed at curtailing inflation without appropriate fiscal adjustment which is another thing that the IMF believes Pakistan needs to work on, for which, greater central bank independence was recommended.
Besides the fiscal measures, other structural reforms will also be needed for straightening up the economic situation to some extent, such as energy sector reforms, restructuring and privatizing loss-making state-owned enterprises, trade liberalization, and a more conducive investment climate.
The IMF noted the adverse impact of domestic and external shocks on the local economy, emphasising the need for garnering political support for tough fiscal and structural reforms.
“Continued engagement with the Fund remains beneficial and policy advice could usefully focus on ensuring fiscal discipline and boosting revenues, overcoming monetary accommodation, strengthening structural reform implementation, and managing fiscal decentralization,” the IMF post-programme monitoring report concluded.