ISLAMABAD: International Monetary Fund (IMF) has identified four substantial risks to economic outlook – uncertainty around the global recovery, policy slippages, failures to meet programme objectives and geopolitical tensions.
In its second to fifth review under the Extended Fund Facility (EFF) arrangement prepared by staff team for IMF Executive Board’s consideration on March 24, and request for rephasing of access, the Fund emphasized that economic outlook continues to be uncertain.
Substantial risks cloud the outlook, amplified by the Covid-19 pandemic and these fall under four broad groups. First, high uncertainty – notably around global recovery and thus the prospects for growth, trade, and remittance inflows arising out of a fresh wave of the pandemic and emergence of new strains worldwide could reverse the current course of the Covid-19 in Pakistan and require additional mitigation efforts, especially if domestic vaccination efforts were to stall.
Second policy slippages remain a risk, amplified by weak implementation capacity and influential vested interests. This particularly affects the fiscal area and thus debt sustainability, including the risk with provinces under-delivering on their commitments to budget parameters.
Third, failures to meet program objectives, including those related to the authorities’ AML/CFT action plan with the Financial Action Task Force (FATF), could hamper external financing and investment.
The IMF report pointed out that capacity constraints and the Covid-19 context have hampered progress in: (i) satisfying the remaining action items related to immediate outcome 9 on terrorism financing investigations and immediate outcome 10 on targeted financial sanctions (end-March 2020 SB, subsumed by (ii)); and (iii) full completion of their AML/CFT action plan to demonstrate a substantial level of AML/CFT effectiveness (end-June 2020 SB; reset to end-June 2021).
The FATF in its statement issued after the plenary meeting February 24, stated that Pakistan should continue to work on implementing the three remaining items in its action plan to address its strategically important deficiencies, namely by: (1) demonstrating that terrorism financing (TF) investigations and prosecutions target persons and entities acting on behalf or at the direction of the designated persons or entities; (2) demonstrating that TF prosecutions result in effective, proportionate and dissuasive sanctions; and (3) demonstrating effective implementation of targeted financial sanctions against all 1267 and 1373 designated terrorists, specifically those acting for or on their behalf.
Fourth, geopolitical tensions could increase oil prices and an adverse shift in investor sentiment affect external financing. At the same time, an upside for growth and program objectives arises from the political calendar: with the senate election having taken place in March 2021, there is a window to accelerate reforms until the general elections scheduled for August 2023. The Debt Sustainability Analysis confirms that public debt remains sustainable with strong policies, but also points to risks from policy slippages and contingent liabilities.
The IMF report highlighted that higher growth, investment, and job creation will crucially depend on addressing longstanding structural weaknesses.
An uneven playing field for SOEs and private companies, corruption, and red tape (especially excessive regulations and licensing requirements, obstacles to paying taxes, and difficulties trading across borders and registering property) remain a drag on productivity, investment, and the development of a vibrant private sector that can create high-quality jobs for a growing labor force.
Against this backdrop, the authorities have put their reform focus on bolstering governance, efficiency, and the business climate. Program risks remain significant, both from domestic and external factors.
Political tensions over reforms could weaken policy implementation, and undermine Pakistan’s adjustment and recovery path as well as debt sustainability.
Geopolitical tensions could increase oil prices and an adverse shift in investor sentiment affect external financing. Close program monitoring, interlinked technical assistance (TA), and financing assurances from key lenders mitigate those risks
Average CPI inflation is expected to average 8.7 percent in fiscal year 2021 and 8 percent in fiscal year 2022, as continued high food prices and energy price adjustments outweigh soft international oil prices and weak domestic demand. The current account deficit is forecast to widen to 1.5 percent of GDP in fiscal year 2021, as a result of the recovery and it should continue to gradually widen toward 3 percent over the medium term with stronger imports triggered by revived domestic demand and exports. However, the market determined exchange rate, together with adequate monetary policy, would help strengthen reserve cover to over three and half (3½) months of imports by fiscal year 2025.
Real GDP growth is expected to gradually improve, but only reach its medium-term potential of 5 percent in fiscal year 2024, later than envisioned in the first EFF review, due to the large shock and the need for continued fiscal adjustment, which is expected to offset some of impact of the stronger private sector growth on the overall economy.
In fiscal year 2021, growth is projected to remain subdued at 1.5 percent –consistent with the forecasted course of the pandemic and vaccinations, and global recovery in the WEO baseline – and recover to 4 percent in fiscal year 2022 as the vaccine rollout, confidence, and investment take hold.
The fiscal program for fiscal year 2021 targets an underlying primary deficit of 0.5 percent of GDP (excluding grants and one-off spending).
Copyright Business Recorder, 2021
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