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Experts weigh in after IMF programme revival

  • Highlight need to address structural issues in economy
Updated 03 Feb, 2022

In a major breakthrough, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation and the sixth review of the extended arrangement under the Extended Fund Facility (EFF) for Pakistan.

The completion of the review allows the authorities to draw the equivalent of SDR 750 million (about $1 billion), bringing total purchases for budget support under the program to SDR 2,144 million (about $3 billion, or 106% of quota), said the international lender in a statement.

Umair Naseem of Topline Securities said the funding will support the foreign exchange reserves of Pakistan.

“We believe that after IMF endorsement, more dollar funding for Pakistan is likely from bilateral, multilateral and other sources,” said Naseem in a note, following Pakistan’s Finance Minister recent announcement that government plans to raise $1 billion ESG compliant Eurobond next month.

Pakistan needs structural transformation of economy: ADB

The IMF in its statement said Pakistan’s economy is set to continue recovering in FY 2022, with real GDP growth projected at 4%, while inflation is expected to pick up this year before gradually slowing down.

It also expects the Current Account Deficit as % of GDP to clock in at 4% in FY22. Fiscal Deficit is also projected at 6.9% of GDP.

Meanwhile, Naseem projected CPI inflation could be higher than projected due to rising oil prices and likely uptick in energy tariffs. “We estimate inflation to clock in at 11% in FY22. Estimates for Current Account and Budget Deficit are largely in line with our estimates,” read the note.

The IMF believes that market-driven exchange rate and prudent macroeconomic policy mix will address external account concerns over the medium term.

Highlighting risks encircling the economy, the IMF said, "Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms,” while calling for efforts to remove structural impediments and facilitate the structural transformation of the economy.

“All the risks highlighted by the IMF are valid,” Tahir Abbas, Head of Research at Arif Habib Limited (AHL), told Business Recorder.

“However, timely measures taken by the government and especially by the State Bank of Pakistan (SBP) aided the curtailment of excessive growth, as it increased the interest rate to 9.75%.”

“Whereas, on the fiscal side, the tax revenue has increased, however, there is a need to increase the tax net,” said Abbas.

He added that risk from the resurgence of the Covid-19 pandemic remains, but the government has indicated that it would not pursue a complete lockdown approach.

“However, reforms at the power sector need to speed up, alongside, the privatisation drive,” he said.

Meanwhile, Fahad Rauf, Head of Research at Ismail Iqbal Securities Limited, while talking to the scribe, said that structural issues persist in our economy.

“Our public sector enterprises are loss-making, which is an issue. Our Tax-to-GDP ratio remains low, despite latest gains as the tax increase is more due to widening imports, while the tax base has not increased by much,” said Rauf.

He added that Pakistan continues to rely on debt financing, whereas, its trade gap remains high.

Pakistan's trade deficit widened by 91.9% during the first seven months (July-January) of the current fiscal year 2021-22 and reached $28.800 billion compared to $15.002 billion during the same period of 2020-21, revealed the Pakistan Bureau of Statistics (PBS) data.

On the other hand, Abbas said that the rise in the trade gap is a result of the government’s earlier expansionary policy and economic stimulus.

He said that the surge in the trade gap was also led by a spike in oil prices in international markets, and was of the view that passing the price hike to consumers may lead to a decrease in demand.

“Lower-income classes can be given a subsidised rate. However, giving oil at a subsidised rate to the masses is not a wise decision, as it may exacerbate fiscal pressure,” he said.

He projected oil prices will go down in March-April, saying that the current prices are not sustainable in the long term.

Achieving 'sustainable' economic growth

Meanwhile, Finance Minister Shaukat Tarin eyes to end Pakistan's dependence on the IMF programme by achieving what he calls ‘sustainable growth.’

“If we start generating 5%-6% balanced growth, which means sustainable growth, then I don’t think we need another IMF programme,” said Tarin in an interview with Bloomberg.

However, Rauf believes that a consistent growth rate of 3-4% would be more in line with sustainable growth, and anything more than that would lead to overheating and fiscal imbalances as the economy heavily relies on imports.

Abbas said Pakistan, being a trading economy, cannot have a current account surplus. “Current Account Deficit is not a bad thing if it remains manageable,” said Abbas, adding CAD should be in the range of 1-2% of GDP.

He added that in order to achieve sustainable growth, the government should focus on increasing exports, especially IT-related. “Instead of incentivising the IT sector, the government should focus on improving its competitiveness.

“We should also focus on agriculture, especially cotton production,” said Abbas.


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