Challenging political environment can slow reform process: IMF

International Monetary Fund (IMF) has said that upcoming elections in Pakistan and a challenging political environment can slow the structural reform process. The IMF report 'Regional Economic Outlook, Middle East, North Africa, Afghanistan, and Pakistan' states that delays in implementation or completion of structural reforms and political and policy uncertainty continue to weigh on growth in Pakistan.
An increase in macroeconomic vulnerabilities and domestic policy slippages has weakened the growth outlook for Pakistan, with growth projected to moderate to 4.7 percent in fiscal year 2019, said the report.
Improved energy supply, investment related to the China-Pakistan Economic Corridor (CPEC) and strong credit growth helped raise Pakistan's growth to an estimated 5.6 percent in fiscal year 2018, from 5.3 last year, but an increase in macroeconomic vulnerabilities and domestic policy slippages has weakened the outlook, with growth projected to moderate to 4.7 percent in fiscal year 2019.
The IMF report states that stronger prospects for the euro area should benefit the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, especially oil importers, through higher exports. The region should also benefit from a marginal strengthening of the outlook for China, a key partner for the region.
Countries in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region need to promote higher and more inclusive growth and create jobs for their young and rapidly growing populations. The report further states that the Middle East, North Africa, Afghanistan, and Pakistan region holds enormous promise, but protracted regional conflicts, low commodity prices, weak productivity, and poor governance impede the region's performance.
Persistent conflicts and their regional spillovers, security concerns, weaker-than anticipated public investment (Afghanistan and Jordan), delays in implementation or completion of structural reforms (Jordan, Morocco, Pakistan and Tunisia), and political and policy uncertainty (Lebanon and Pakistan) continue to weigh on growth. Overall, the outlook has softened slightly since the October 2017 Regional Economic Outlook.
Moreover, a high perception of corruption and lack of transparency (IMF, forthcoming) in several countries could not only affect macroeconomic outcomes directly, reducing investment and productivity, but could also heighten social tensions and hinder reform.
Additional efforts are also being made to bolster the business environment, with Pakistan recently strengthening its bankruptcy framework. Following three years of decline, exports of MENAP oil-importing countries grew by 6.4 percent in 2017 and are projected to accelerate by 8.4 percent in 2018 and 8.6 percent in 2019. This largely reflects improved external demand, greater exchange rate flexibility (Egypt, Pakistan and Tunisia), gains in competitiveness (Morocco and Tunisia), and a pickup in the prices of phosphates (Morocco, and Tunisia), metals (Mauritania), and cotton (Pakistan).
Tighter and more volatile global financial conditions could increase borrowing costs further for MENAP oil importers, adding to existing fiscal sustainability concerns, weighing on bank balance sheets, and undermining private sector activity. Such tightening could be particularly challenging for countries facing significant financing needs in the near term. Taking into account the gross financing needs for 2018, a 200 basis point increase in interest rates relative to the baseline would raise financing costs for Lebanon, Egypt and Pakistan by 0.9, 0.8 and 0.7 percentage point of GDP, respectively. In addition, tightening of global financial conditions could precipitate capital outflows from the region that would put pressure on external positions and exchange rates.