IMF projections

The last (twelfth) quarterly review of the IMF Extended Fund Facility to Pakistan was released on September 28, 2016. This review contains the final set of projections by the IMF of key macroeconomic variables from 2016-17 to 2019-20.
The projections are extremely positive about the medium-term to long-term prospects for the economy of Pakistan. They are based on the key assumption that the economy has sufficiently stabilised following the three-year Fund Programme and is ready to embark on in a major way on a higher growth trajectory. The authorities must have welcomed these projections as they represent a fitness certificate by IMF. This ought to increase investment, both domestic and foreign, in Pakistan.
The key elements of the projections up to 2017-18 are as follows:
(i) The GDP growth rate will go beyond 5%.
(ii) The rate of inflation will remain subdued at close to 5% per annum.
(iii) Investment will show a strong recovery with a growth rate annually in real terms of over 8%.
(iv) Tax revenues will continue to rise rapidly from 12.4% to 13.6% of the GDP by 2017-18.
(v) The fiscal deficit will fall sharply from 4.6% of the GDP in 2015-16 to 2.9% of the GDP by 2017-18. Consequently, in two years, the public debt to GDP ratio will fall from 67% to less than 62%.
(vi) Foreign exchange reserves will rise from $18 billion, as of June 2016, to $22 billion by the end of 2017-18, despite a near tripling in the current account deficit. This will be achieved due to more than doubling of foreign investment and big jump in external borrowing.
(vii) Exports will exhibit some dynamism and show cumulative growth of 10% from 2015-16 to 2017-18, despite persistent recessionary conditions in global trade. IMF expects this to be compensated for by depreciation of the rupee to Rs 113 per US dollar by 2017-18. Remittances will also demonstrate some growth.
Why has IMF opted to make such positive projections of Pakistan's economy? The obvious explanation is that the IMF staff mission has a vested interest in demonstrating to the superiors in Washington that it has managed a very successful programme.
Occasionally, one hears, however, exhortation from agencies, including IMF and the SBP, that momentum must be maintained in the reform process. Are the abovementioned projections by the IMF based on the full implementation of the required reforms? If so, it would have been useful to present a macroeconomic scenario with weaker implementation of reforms.
This exercise is particularly relevant now since the process of pork-barrelling and granting of concessions has started in the lead up to the elections in the first half of 2018. It is increasingly unlikely that deep structural reforms will be implemented in the intervening period.
What has been the fate of the IMF projections in the first half of 2016-17? It is indeed unfortunate that contrary to these optimistic projections the economy has started unravelling. The divergence between projections and actual outcomes has become too large, too soon.
They key areas of divergence of the actual outcomes from the projections made by IMF for the first half of 2016-17 are as follows:
(i) First indications are that the GDP growth will be significantly less than 5% in 2016-17. In the first half of the year, both manufacturing and agriculture are showing a growth rate between 2.5 and 3.5%, while electricity generation is up by about 4%. At this rate, it is unlikely that by the end of the year the GDP will show a growth rate of 5% or more.
(ii) Fortunately, inflation has remained low at below 4%. However, the 'low base' effect could start operating from February 2017 onwards and take the rate of inflation to beyond 5%.
(iii) There has been a 6% real growth in imports of machinery from July to December 2016, according to the SBP. Inclusive of CPEC, imports of power generating machinery have actually declined. Despite extraordinarily low interest rates, outstanding bank credit to the private sector for fixed investment has increased in real terms by only 6% in the first five months.
(iv) With the current growth rate of FBR revenues, the tax-to-GDP ratio will fall and not rise by the end of 2016-17.
(v) Already, in the first six months, the fiscal deficit is estimated at almost 2.6% of the GDP. The annual target of 3.6% of the GDP is likely to be substantially exceeded.
(vi) Exports and remittances are actually declining, rather than rising, as anticipated by the IMF. The current account deficit in the first six months is 46% above the Fund's projections.
(vii) Foreign exchange reserves have shown little growth from $18.1 billion in June 2016. They have actually started falling since October 2016. The IMF projection of reserves by end June, 2017 of $20.8 billion is looking increasingly elusive.
There are two other possible explanations for the biased and defective projections by the IMF. The first is that the IMF staff members, who have made the projections, may not possess the requisite professional competence. This reminds one of the observations by the Nobel Prize winning economist, Joe Stiglitz, that postgraduates from second or third tier universities of the USA join the IMF and other international agencies, while the output from top universities goes mostly into academia. In recent times, the problem has been compounded by the diversion of the best IMF personnel to managing large loan programs in European countries like Greece, Ukraine and Poland.
Finally, there could be on 'out of the box' explanation. The upbeat nature of the projections may be motivated by an attempt to lull the Authorities into a state of complacency. This will inevitably reduce the focus on reforms and thereby create conditions for a return of the IMF to Pakistan, within the next two years. However, this could be based on prior actions that are not necessarily only economic in nature.
Hopefully, the macroeconomic projections will be carefully scrutinised, in light of recent developments, during the forthcoming Article IV consultations with the IMF. Also, it would be extremely useful if a list of reforms is indicated for taking Pakistan to a higher growth trajectory. Similar to the 2015 consultations, the medium term macroeconomic scenarios, with reform and with no reform, should also be presented.
(The writer is Professor Emeritus and former Federal Minister)