IMF programme targets: performance

This is an appropriate time to evaluate the initial performance of Pakistan’s economy in the first half of 2024-25, in relation to the IMF programme targets for the year. Any major deviations are likely to feature in the forthcoming first review of the three-year Extended Fund Facility.

The IMF programme expectations are that in 2024-25 the economy of Pakistan will stabilize significantly while achieving a modest improvement in the GDP growth rate. The inflation rate will fall sharply and the two deficits, both in the budget and in the current account, becoming more manageable or remaining low.

The first indicator of the state of the economy is the GDP growth rate. The programme expects this to be 3.2% in 2024-25. This will represent a modest improvement over last year’s growth rate of 2.4 percent.

However, the unfortunate reality is that in the first quarter of 2024-25, the economy registered a very low growth rate of only 0.9 percent. Two sectors have performed poorly. These are major crops and large-scale manufacturing, with growth rates respectively of negative 11 percent and negative 1 percent.

The message is clear. Pakistan’s growth has been stifled by a number of negative factors. The large-scale manufacturing sector faces a tax burden, which is over four times the national average. In addition, there has been substantial cost-push inflation due to the escalation in electricity and gas tariffs.

The export industries are seeing a loss of profitability and ability to compete due to the process of increasing overvaluation of the rupee. After a gap of seven years, the Real Effective Exchange Rate index has gone significantly beyond 100 to 108, implying that there is need for some downward adjustment in the value of the rupee.

SBP will need to follow a more market-oriented policy on the exchange rate. IMF expectation is that the rupee will depreciate by over 7 percent in 2024-25.

The IMF projection is that the average rate of inflation in 2024-25 will be 9.5 percent and rise somewhat by June 2025 to 10.6%. The actual rate of inflation was 7.3 percent in the first six months of 2024-25. This is already significantly below the annual target. In fact, the rate of inflation in December 2024 was as low as 4.2 percent.

The big reasons for the large decline in the rate of inflation are, first, a strong supply response earlier by the agricultural sector, especially with the bumper crop of wheat. This has reduced the rate of inflation in food prices to only 2.7 percent in the first half of 2024-25.

Second, lower international prices, especially of oil, and a nominally stable exchange rate have largely eliminated ‘imported’ inflation. Third, there has been virtually no expansion in money supply due to the substantially reduced bank borrowing by the federal government, because of reasons given later.

The IMF programme projection is also for a small increase in the investment to GDP ratio to 13.6 percent of the GDP in 2024-25. The less pressure on commercial banks to lend to the federal government by purchase of bonds has created much more space for lending and led to a tripling of credit to the private sector. This has also been facilitated by a big reduction in interest rates.

However, the large credit flows to the private sector have not yet been accompanied by a corresponding increase in the import of machinery. This has increased by 15 percent.

Turning to the crucial indicators of the state of Pakistan’s external balance of payments, there is good news. The IMF expectation is of a current account deficit of close to 1% of the GDP, equivalent to USD 3.6 billion, in 2024-25.

However, during the first six months a surplus has actually been generated in the current account of USD 1.2 billion.

An analysis of the trends reveals that exports have shown faster growth of 7.1 percent, as compared to the IMF projection for the year of only 2.1 percent.

Further, import growth has been restricted to 9.3 percent, compared to the projected growth rate of 11.3 percent. These positive outcomes have been substantially augmented by the unprecedented 33 percent increase in workers’ remittances.

However, the good news on the balance of payments front tends to end here. The surplus in the financial account of the balance of payments has fallen substantially by 89 percent in relation to the surplus in the first six months of 2023-24.

The IMF expects the financial account surplus to be USD 6.3 billion in 2024-25, as compared to the actual magnitude of only USD 0.5 billion in the first six months of 2024-25.

The main reason for the decline is the sharp fall of net inflows into the general government account. Disbursements have declined by over 42 percent, while the amortization payments have increased by almost 13 percent.

Consequently, there has been a net outflow in the government account. Overall, the result is that the overall balance of payments surplus is lower by 43 percent.

This negative outcome on the financial account is perhaps the most vulnerable part of Pakistan’s economy.

The big decline in external borrowing, both from public and private sources, and the shortfall in meeting the external financing targets in the IMF programme for 2024-25, is likely to be one of the areas of primary focus by the IMF mission in the forthcoming review.

Pakistan will need to show how it can mobilize more external support and attract substantially more foreign direct investment.

The second area of primary focus is likely to be the state of public finances. The bottom line is the size of the primary surplus/deficit. One of quantitative performance criteria in the programme is a ceiling on the general government primary surplus of Rs 2877 billion as of end-December 2024.

The Ministry of Finance has released recently information on fiscal operations in the first half of 2024-25. There is a very large primary surplus of Rs 3604 billion. This appears to be an excellent fiscal performance by the federal and provincial governments in the first half of 2024-25.

However, the IMF may argue that this is due to the lumpy transfer of the annual profits of the SBP to the federal government of Rs 2500 billion in the first quarter of 2024-25. A phasing of this transfer to half the annual profit in the first six months would have implied a transfer of Rs 1250 billion. Consequently, the primary surplus would have been reduced to Rs 2354 billion, significantly below the target level of Rs 2877 billion.

This also reflects the relative failure in meeting the various revenue targets, including that of FBR revenues. The shortfall in the first six months is estimated at Rs 348 million. This includes a failure to achieve the target of Rs50 billion from retailers.

At the provincial level, collection of the agricultural income tax under the new law has been postponed to the 1st of July 2025.

Overall, Pakistan’s economy has apparently performed well in relation to the targets in the IMF programme for 2024-25. The two areas of focus during the first review by the IMF Staff Mission are likely to be the lower inflows of external inflows which could put pressure on reserves in coming months and the shortfall in achieving revenue targets leading to significantly larger budget deficit and smaller primary surpluses by the end of 2024-25.

Copyright Business Recorder, 2025