Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population. This was stated in a handout and data updated on International Monetary Fund (IMF) website on Thursday, after the Executive Board approved a 39-month extended arrangement under the Extended Fund Facility (EFF) for Pakistan for an amount of SDR 4,268 million (about US$6 billion or 210 percent of quota) to support the authorities' economic reform program.
The Fund-supported program is expected to unlock support from multilateral and bilateral partners in excess of $38 billion over the program period, which is crucial for Pakistan to meet its large financing needs in the coming years, states the handout.
Pakistan's economy is at a critical juncture. The legacy of misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves.
Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, amid a large informal economy. The EFF-supported program will help Pakistan reduce economic vulnerabilities and generate sustainable and balanced growth focusing on: a decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending; a flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves; to eliminate quasi-fiscal losses in the energy sector; and to strengthen institutions and enhance transparency.
Following the Executive Board discussion, David Lipton, First Deputy Managing Director and Acting Chair, said: "Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth. In this context, the authorities' program aims to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyze significant international financial support, and promote strong and sustainable growth.
"A decisive fiscal consolidation is key to reducing the large public debt and building resilience, and the adoption of the fiscal year 2020 budget is an important initial step. Achieving the fiscal objectives will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by the provinces to support the consolidation effort, and effective public financial management to improve the quality and efficiency of public spending.
"Protecting the most vulnerable from the impact of adjustment policies will be an important priority. This will be achieved by a significant increase in resources allocated to key social assistance programs, supporting measures for the economic empowerment of women, and investment in areas where poverty is high.
"A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan's (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability.
"An ambitious agenda to strengthen institutions and remove impediments to growth will allow Pakistan to reach its full economic potential. Addressing structural weaknesses in the energy sector and improving the governance of state-owned enterprises will ensure efficiency and better services, thus boosting economic activity. Moreover, improving the business climate, strengthening efforts to fight corruption, and enhancing the AML/CFT framework will create an enabling environment for private investment and job creation.
"The strong financial support to the authorities' policy efforts by Pakistan's international partners is essential to meet the large external financing needs in the coming years and allow the program to achieve its objectives."
The authorities' comprehensive economic reform program, supported by the EFF, aims to stabilize the economy and lay the foundation for robust and balanced growth. Key elements include: A decisive fiscal consolidation to reduce public debt and build resilience, starting with the adoption of an ambitious fiscal year 2020 budget.
The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilization by 4 to 5 percent of GDP at the federal and the provincial level over the program period; expanding social spending, including through the strengthening and broadening of safety nets to support the most vulnerable; a flexible, market-determined exchange rate to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks.
This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank; energy sector reforms to eliminate quasi-fiscal losses and encourage investment, including by depoliticizing gas and power tariff setting and over the program period, gradually bringing the sector to cost recovery; and structural reforms through strengthening institutions, increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.
IMF has projected government debt including IMF obligations at 76.9 percent of GDP for 2019-20 compared to 74.9 percent for 2018-19. External general government debt has been projected at 32 percent of GDP for 2019-20 compared to 26.5 percent for 2018-19.
GDP growth rate for Pakistan has been projected at 2.4 percent for the current fiscal year against 3.3 percent for 2018-19. GDP at market prices has been projected at Rs 44,446 billion compared to Rs 38,559 billion for 2018-19.
Consumer prices (period average) have been projected at 13 percent for the current fiscal year against 7.3 percent for the 2018-19. Consumer prices (end of period) have been projected at 11.8 percent for the current fiscal year against 8.4 percent for 2018-19.
The Fund has projected gross saving at 12.1 percent of GDP for 2019-20 compared to 10.8 percent for 2018-19. The government saving has been projected at negative 3.8 percent for 2019-20 compared to negative 3.6 percent for 2018-19, while non-government including public saving has been projected at 15.9 percent for 2019-2020 against 14.5 percent for 2018-19.
Under the sector enterprises gross capital formation has been projected at 14.7 percent for 2019-2020 against 15.4 percent for 2018-19. Government capital has been projected at 3.3 percent for 2019-20 compared to 3.1 percent for 2018-19, while non-government (including public sector enterprises) has been projected at 11.4 percent for 2019-2020 against 12.3 percent for 2018-19.
IMF has projected revenue and grants at 16.3 percent of GDP for 2019-20 compared to 15 percent for 2018-19. Expenditure (including statistical discrepancy) has been projected at 23.4 percent of GDP for 2019-20 compared to 21.7 percent for 2018-19.
The Fund has projected budget balance (including grants) at negative 7.1 percent for 2019-20 compared to 6.8 percent for 2018-19. Budget balance (excluding grants) has been projected at negative 7.3 percent for 2019-20 compared to negative 7 percent for 2018-19.
The primary balance (excluding grants) has been projected at negative 0.6 percent for 2019-20 compared to negative 1.8 percent for 2018-19.
Further domestic general government debt has been projected at 44.9 percent of GDP for 2019-20 compared to 48.4 percent for 2018-19.
The Fund has projected net foreign assets for Pakistan at 8.9 percent for 2019-20 compared to negative 6.3 percent for 2018-19. Net domestic assets have been projected at 3.2 percent of GDP for 2019-20 compared to 17.1 percent for 2018-19.
Broad money (percent change) has projected at 12.1 percent for 2019-20 compared to 10.8 percent for 2018-19. Reserve money (percent change) has been projected at 13.5 percent for 2019-20 compared to 15.7 percent for 2018-19, while private credit (percent change) has been projected at 13.3 percent of GDP for 2019-20 compared to 17.1 percent for 2018-19.
IMF has projected merchandise exports, US dollars (percentage change) at 8.2 percent of GDP for 2019-20 compared to 0.2 percent for 2018-19, while merchandise imports has been projected at negative 4.7 percent for 2019-20 compared to negative 4.2 percent for 2018-19.
Further the Fund has projected current account balance (in percent of GDP) at negative 2.6 percent for 2019-20 compared to negative 4.6 percent for 2018-19. Financial account (billions of US dollars) has been projected at 8.7 for 2019-20 compared to 10.7 for 2018-19.
External public and publicly guaranteed debt has been projected at 234 percent of GDP for 2019-20 compared to 225.2 percent for 2018-19.
The Fund has projected debt service at 45.7 percent of GDP for 2019-20 compared to 37.9 percent for 2018-19.
Gross reserves (in millions of US dollars) have been projected at $11187 million for 2019-20 compared to $6824 million for 2018-19.
In months of next year's imports of goods and services has been projected at 2.2 percent for 2019-20 compared to 1.4 percent for 2018-19. Underlying fiscal balance (excluding grants) has been projected at negative 7.3 percent for 2019-20 the same as for 2018-19.
General government and government guaranteed debt (including IMF) has been projected at 0.5 percent of GDP for 2019-20 compared to 79.1 percent for 2018-19.
Net general government debt (including IMF) has been projected at 73.5 percent for 2019-20 compared to 70.7 percent for 2018-19. Terms of trade have been projected at negative 0.1 percent for 2019-20 compared to negative 1.3 percent for 2018-19. Real per capita GDP has been projected at 0.5 percent for 2019-20 compared to 1.4 percent for 2018-19.

Copyright Business Recorder, 2019

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