Article IV Consultations and ninth review under the 6.64 billion dollar Extended Arrangement the IMF Mission projected a growth of 4.5 percent this fiscal year against the government budgetary target of 5.5 per cent and inflation to rebound to an average rate of about 3.7 percent due to bottoming out of the effects of low commodity and food prices. In the medium term, inflation is likely to hover around 5 percent, anchored by prudent monetary and fiscal policies.
The current account deficit is expected to remain at close to 1 percent of GDP in fiscal year 2015-16 as the benefits of lower oil prices will continue to be offset by weak export performance and a more moderate growth in remittances owing to a weakening outlook for non-oil growth in the GCC countries.
The review notes that prior to the current fund-supported economic stabilisation program, Pakistan's debt-to-GDP ratio was on an upward trend as a result of large fiscal deficits, although debt dynamics benefited from low effective real interest rates provided by central bank financing. However, significant fiscal consolidation-lowering the budget deficit from 8.9 percent of GDP in FY2011/12 to 5.4 percent in FY2014/15-has helped reverse this adverse trend.
The coverage used for public debt includes federal and provincial governments, but does not include state-owned enterprises (SOEs). Consequently, government guarantees and circular debt among energy SOEs represent contingent liabilities amounting to 2.3 percent and 0.8 percent of GDP, respectively.
The review identified that the near-term risks to macroeconomic outlook have slightly tilted to the downside as external vulnerabilities include a protracted period of slower growth in key advanced and emerging market economies, hurting exports and remittances and the key medium-term risk could lie in slower reform implementation. Deterioration of the power sector's and other state-owned enterprises' (SOEs) financial performance would lead to higher budgetary transfers to compensate for companies' losses. Together with lower tax revenue, this would reduce the fiscal space for public investment and raise the deficit, potentially crowding out private investment and fuelling inflation.
A reversal of stability gains together with slippages in energy sector and other structural reforms would imply that economic confidence and the business climate could deteriorate quickly, with increased instability and resumed power outages in the industry.
As a result, medium-term growth could slow to about 3.5 percent (the estimated long-term growth in the absence of significant structural reforms to lift productivity and investment), with increased domestic and external vulnerabilities. The ongoing legal challenges to electricity surcharges and the still challenging political and security conditions could affect economic activity and undermine the fiscal consolidation efforts. Conversely, fast implementation of CPEC projects and an improvement in the security situation could boost investment and growth, and removal of international trade and financial sanctions against Iran could have a positive impact on energy supply to Pakistan, the review further added. Foreign exchange reserves are on track.
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