IMF review - between the lines

The underline tone of the IMF in the latest IMF article 1V consultation sounds softer as the Fund seems satisfied with economic growth and controlled inflation. The IMF has highlighted concerns with both fiscal and current accounts. But unlike previous times, Pakistan might have an option of alternate savior under the name of CPEC, in case of a balance of payment crisis, should Pakistan fail to satisfy Fund’s pre-conditions such as currency adjustment.

The Fund is in line with government growth target of 5.3 percent in outgoing fiscal year, and expects next year growth at 5.5 percent against government target of 6 percent. The reasons cited for higher growth are partly similar to what the country is experiencing such as better power generation and CPEC related expenditure. However, “growth - supporting structural reforms” is a bit confusing as there are not much structural reforms to spur growth.

The other two reasons which are missed by fund for higher growth are 1) rising per capita income and bulging urban middleclass which is driving consumer demand 2) fiscal expansion is driving economic growth. Now that is a fine point - it’s not structural reforms but public infrastructure building that is boosting growth. The numbers demonstrate the phenomenon - rising share of public sector credit in M2 stock whilst incremental credit (barring fiscal financing) is highest for PSEs.

In case of inflation, the situation is not bad and fund’s estimates are closer to reality, even better than government’s conservative projections. Hence, inflation is of not an immediate problem and the Fund is not raising alarm on “appropriately accommodating” monetary policy. However, vigilance is warranted for any tightening in case of emergence of inflationary pressures or foreign exchange market pressure.

Chances of turbulence in foreign exchange market are higher. The fund has remained almost silent on currency overvaluation as it is well aware of Dar’s fixation with currency. Even in its forecast for FY18, the fund has not shown GDP in dollar terms.

But the IMF was not shy of mentioning fiscal and external slippages. The fiscal deficit will miss FY17 target of 4.2 percent, and is estimated to be at 4.3 percent without grants and 4.5 percent with them. BR Research opines that it is optimistic as it requires around 25 percent FBR revenue growth and an even higher growth for non-tax revenues. With just one working week before the next fiscal year, there are no signs of any non-tax revenues receipts.

What concerns the fund most is slippages in external account. The IMF expects current account deficit to stand at 3.0 percent of GDP in FY17, and 3.2 percent in FY18. The CAD hovered around 1.0-1.3 percent of GDP in previous four years. Now that is alarming and questions the sustainability of foreign exchange growth in the absence of meaningful FDI.

The gross country reserves are today down from by around $4 billion from its peak in Oct 16, and its covering 3.8 months of next year imports. “....reserves have declined in the context of a stable rupee/dollar exchange rate”. This argument is the only usage of currency in the press release. Does it mean to arrest the fall in reserves requires some currency adjustment? (Read: “when will rupee fall” published June 15, 2017)

The bottom-line is that the reverse position is critical for both stable currency and fate of going back to the fund. In the last two weeks, it has fallen by $1.6 billion. However, an Eidi of $400 million is coming from the ADB soon.