International Monetary Fund Mission Chief for Pakistan, Harald Finger has stated that with continuous reform efforts, Pakistan has a good shot at reinforcing the recent stability gains and reaching a level of economic resilience which would not require renewed financial assistance for stabilisation from the IMF. In an interview available on Fund's website, Harald Finger talked about the state of the economy, the challenges ahead, and the next steps for Pakistan.
Pakistan's economy has stabilised from near-crisis circumstances and economic growth has gradually increased under the recently completed three-year economic reform programme supported by a $6.15 billion arrangement under the IMF's Extended Fund Facility, Harald Finger said. Answering a question, the IMF Mission Chief said that over the past three years, Pakistan has greatly strengthened the resilience of economy and begun making inroads towards addressing longstanding structural economic challenges. Not everything worked out fully as envisaged, of course, but it is important for us to recognise the programme's achievements. For instance, foreign exchange reserves have tripled, supported by foreign exchange purchases and external borrowing.
The fiscal deficit declined by 2.5 percent of GDP (not counting a large payment to clear energy sector arrears just before the programme started). This was made possible by removing untargeted energy subsidies that disproportionately benefited the affluent, significantly raising tax revenue through removing exemptions and concessions, and taking a more systematic approach to bringing various economic groups into the tax net.
These measures allowed for an increase in investment spending and social protection. Enrolment in the Benazir Income Support Programme has increased by 1.5 million families, and stipends were raised by more than 50 percent.
Finger further stated that in the energy sector, power outages have gradually decreased and financial performance is strengthening. As a result, accumulation of arrears in the sector has also declined significantly, thereby relieving pressures on the budget. Increased independence of the State Bank of Pakistan has improved the monetary policy framework. A new comprehensive strategy to improve the business climate has been adopted and started to be implemented.
While there have been important achievements, the outlook for economic growth has also turned broadly favourable. Exports and agricultural output have been declining amid a more challenging external environment and appreciating real exchange rate. These are important causes for concern. But private credit growth has been recovering, and strong machinery imports, cement consumption, and gradually rising core inflation also point to firm domestic demand. Moreover, large-scale investment under the China-Pakistan Economic Corridor is beginning to be implemented. With the authorities' accomplishments in strengthening the economy's resilience and a broadly favourable outlook for growth, the IMF's Managing Director, Christine Lagarde, spoke of a moment of opportunity for Pakistan during her recent visit to Islamabad. She emphasised that now is the time for the country to continue its transition towards becoming a full-fledged emerging market by addressing the remaining challenges and implementing policies for higher and more inclusive growth.
Replying to another question, Harald Finger said that Pakistan has done relatively well over the last three years, but of course much remains to be done. It will still take a multi-year effort across several policy areas to address the many challenges Pakistan faces. "I am often reminded of the classic question of whether the glass is half empty or half full." "Let me highlight some of the main structural challenges. Exports represent a small share of GDP, and as I mentioned, have been falling. Investment (both public and private) remains much too low to support sustainable growth, and social spending on health and education is well below levels seen in comparative countries. Despite the progress made over the course of the programme, tax revenue collection remains much below Pakistan's potential; this limits the space for investment and social spending, but also points to fairness issues in light of still widespread tax evasion," he added.
Business climate and governance indicators are still sub-par, the financial sector remains underdeveloped, and the gender gap on human, social and economic dimensions is among the largest in the world. Power outages, while having declined over the last three years, still persist, as do the financial losses of ailing public enterprises.
There also remains a stabilisation challenge. Public debt is still high, and external financing needs are projected to increase, though without large spikes in any particular year. A sustained drive at tackling these and other challenges will be needed to support high and inclusive growth that is steady.
With continuous effort in reforms, Pakistan has a good shot at reinforcing the recent stability gains and reaching a level of economic resilience which would not require renewed financial assistance for stabilisation from the IMF. Everything will depend on the authorities' policy effort, along with any unforeseen shocks, of course. Our close partnership with Pakistan will continue through policy dialogue, including in the context of Article IV consultations and post-programme monitoring, and capacity building, he said.
While economic reform programmes can be difficult to implement and take time to bear fruit, the most important lesson for us is that our shot at success is greatly improved when we can support an economic programme that is home-grown, and widely debated in society. We also learned from our experience with Pakistan and many other countries that being flexible and agile is just as important.
Harald Finger said that a lively public debate about economic policy choices and priorities is welcome and constitutes a healthy part of the policymaking process. "Overall, I find that we have been able to make our assessments and policy advice heard in the public debate quite well. We have been engaging through op-eds, regular press conferences and conference calls, and through our Resident Representative in Islamabad, Tokhir Mirzoev, who is in regular contact with journalists and editors. The Managing Director's recent visit was also a welcome opportunity for outreach. Occasionally, we have had to issue ad hoc press statements when our views were grossly misrepresented," he said.
There have been critical voices over the course of the programme. They have alleged that national account data had a political bias, that there was either an excessive focus on fiscal adjustment or no real fiscal adjustment at all (sometimes both positions have even been taken in the same article), that the programme was anti-poor, that too many waivers were given and so on. Some of the arguments made were grossly misleading, for example by misstating the size of fiscal adjustment by adding stocks and flows, or by alleging that development spending was cut under the programme when in fact it went up by more than 50 percent. The critics also highlighted important points, on which we agree, chiefly by pointing to the many challenges Pakistan still faces in the period ahead and the substantial reform agenda it will need to implement. But the programme has helped Pakistan today being financially stronger and better positioned to tackle these challenges, Harald Finger concluded.
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