THURSDAY APRIL 07: Budgetary support: Pakistan needs IMF lending: ADB

ISLAMABAD: Pakistan needs budgetary support/programme lending from the International Monetary Fund (IMF). This was stated here on Wednesday by Rune Stroem, Country Director of ADB to Pakistan, at a press conference arranged to launch the ADB report, titled 'Asian Development Outlook 2011'. Stroem said that Pakistan might face increase in poverty levels in the current calendar year.
The ADB Country Director said that "energy shortfalls are lowering real growth by at least 2 percentage points annually in Pakistan". "There is an interlink between the political reality and the economic reality. The overall revenue collection is slipping away as compared to the target whereas the total expenditures to the security arrangements are increasing", Stroem said.
He said that documentation of the economy is needed. "The government of Pakistan will start repayments to IMF that are scheduled in 2012". He added that food inflation and fuel costs in the country are increasing gradually. According to the report, floods in July-August 2010 had affected FY2011's prospects.
Damage was less severe than initially feared, but agriculture and communications were hit hard. Total damage has been put at more than $10 billion, half in agriculture. With growth prospects reduced to 2.5 percent for FY2011 (Figure 3.20.8), average growth for FY2008-FY2011 is seen falling to 2.9 percent.
The report said that inflation accelerated after the floods to 15.7 percent in September, reflecting actual and expected shortages. It remained above 15 percent through December, falling to 14.2 percent in January owing to a government-freeze on oil and electricity prices.
It is expected to stay high through FY2011, for an average annual 16.0 percent, and is then expected to recede in FY2012 to 13.0 percent (moderation in international food prices is likely to be at least partly offset by electricity price rises). "We expect Pakistan's economy to continue to build on the vital signs of recovery. The good news is that Asia is maintaining a strong growth trajectory, and expanding South-South links present supplementary opportunities for developing Asia, including Pakistan.
Pakistan's recent entry in the Central Asian Regional Co-operation (CAREC) opens up new trade and development corridor. But it all depends on getting back on course in implementing the fiscal reforms and creating enabling environment for the industry and job creation for the youth in the years ahead, Stroem added.
Pakistan faces several economic challenges. The current subsidy requirements and support for SOEs are incompatible with creating the fiscal space needed to support investment in infrastructure and social sectors. Improvements in productive capacity are a prerequisite for a diversified and higher value-added export base. Improved confidence in Pakistan's economic prospects, essential to attract the necessary domestic and foreign investment, will depend on transparent revenue policies and implementation of expenditure policies that increase efficiencies and outputs.
Financial viability of the energy sector and sustainable policies for commodity financing are also necessary to ensure an attractive environment for private and public investments. All of these will provide important support for a vibrant, expanding private sector capable of providing productive employment for Pakistan's predominately young population.
The total disbursements made to Pakistan by ADB during the calendar year 2010 were $799.18 million, 117 percent more than the projected amount of $683.28 million. According to 'Asian Development Outlook 2011', Pakistan began FY2011 with a budget that was based on policy measures that proved difficult to carry out. Revenue targets called for 26 percent growth of tax receipts, well over the 5-year average of 14 percent.
Meeting them would have been hard even if a 'reformed general sales tax' had come into effect. A 'reformed' tax was initially scheduled for July 2010, but the process remains politically contentious, and any changes to the tax will have a limited effect on FY2011 receipts.
Energy-related circular debt (due to payment arrears in the sector), which stood at Rs 446 billion at end-FY2010, is expected to surge by end of FY2011. With a fiscal deficit at 2.9 percent of GDP in the first half of FY2011, the annual fiscal target was also revised to 5.5 percent under the weight of higher international food and energy prices, escalating subsidies, and subdued revenue performance.
The report points out that with lower foreign funding, deficit financing is expected to rely heavily on the domestic banking system. After easing in FY2010, government borrowing from that source has surged in FY2011, reaching Rs 379 billion by 12 February, compared with Rs 330.4 billion for FY2010 as a whole.
The pace of government borrowing from the banking system has supported a rapid expansion of broad money and reserve money: broad money growth for FY2011 through 26 February 2011 was much higher (7.7 percent) than in the same period of FY2010 (5.7 percent). The equivalent figures for reserve money were 14.9 percent and 10.6 percent.
Fiscal prospects for FY2012 are likely to improve as the political environment eases sufficiently to implement the revenue-enhancing and fiscal-management initiatives. Progress is expected in implementing reforms for the energy sector consistent with a move toward financial viability with a phased elimination of subsidy requirements, leaving enhanced fiscal space for development program.
According to the report, Pakistan's external reserves reached a record high of $17.4 billion in early February 2011 (Figure 3.20.13), amounting to more than 5 months of imports of goods and services. This buildup essentially reflects IMF releases of $7.1 billion under the stand-by arrangement, an additional $450 million in emergency support in September 2010, and support from the Coalition Support Fund ($633 million) at end-December 2010. The central bank's holdings of liquid foreign exchange reserves ended FY2010 at $13.9 billion.
According to the report, while import growth remained modest, a significant expansion of exports during the first 7 months of FY2011 moved the current account deficit into near balance, at 0.5 percent of GDP, but it is expected to widen to 1.7 percent for full year FY2011, reflecting higher international food and commodity prices.
For the first 7 months of FY2011, exports of textiles and rice showed strong growth in value terms, mainly on higher world prices. Remittances increased further, broadly in line with inflation, but non-debt creating inflows continued to decline, with private FDI inflows about 16 percent below the same period of the previous year.
The current account deficit is expected to edge upward in FY2012 to 2.3 percent of GDP as projected declines in global food and commodity prices are more than offset by the impact of improved growth and increased demand for imports, including for post-flood reconstruction.
According to 'Asian Development Outlook 2011', developing Asia will continue to expand solidly over the next two years, even as inflation, geopolitical uncertainties and the need to develop new sources of growth present looming challenges to policy makers.
South Asia will maintain its recent robust economic performance with forecast growth of 7.5 percent in 2011 and 8.1 percent in 2012, following a 7.9 percent expansion in 2010. India's 2010 performance was particularly strong and broad-based, even with fiscal consolidation and monetary tightening, and the economy is set to strengthen further to post 8.2 percent growth in 2011 and 8.8 percent in 2012. Pakistan's devastating floods weighed on its growth performance, while the end of the conflict in Sri Lanka continued to help underpin its economic expansion.
The report says that Pakistan's economy achieved modest revival in 2010 despite infrastructure shortages and security concerns. Continued structural challenges underscored by floods in August 2010 affected growth prospects for the current fiscal year. According to the report, Pakistan may have 2.5 percent GDP growth in the calendar year 2011, that is 1.6 percent less than the last corresponding year.
The report forecasts the GDP of Pakistan to be 2.5 percent, that is 5.7 percent less than that of India's that has been forecasted to have 8.2 percent GDP growth in 2011. The report says that the FY2010 has proved to be a third consecutive year of declines in investment in large-scale manufacturing (down 15.4 percent) and electricity and gas (11.0 percent lower). Private savings have similarly declined owing in part to the failure of key asset rates to keep pace with inflation,
Pakistan's current budget expenditure is relatively rigid, and it is difficult to offset overruns in one category with reductions in another. Inflexible current expenditure (such as security, interest, and pensions) alone absorbed revenue of 7.4 percent of GDP in FY2010, or about 82 percent of FBR tax receipts. Subsidies amounted to another 1.7 percent of GDP.
The report says that Pakistan's public debt (excluding guarantees) as a share of GDP continued to climb in FY2010. Government domestic debt amounted to 37.0 percent of GDP, including commodity debt and liabilities of SOEs. External debt rose to 31.9 percent of GDP, including 0.6 percent of GDP in external liabilities of SOEs. Interest payments due on domestic debt represent a heavy burden, accounting for 3.9 percent of GDP in FY2010, or 43 percent of FBR revenue. External debt amortisation payments, excluding amounts owed to the IMF, are relatively stable for FY2010-FY2013 at about $3.3 billion. Amounts due for FY2012 and beyond will be raised substantially by repayment obligations to the IMF, the report added.