In a critical assessment of the performance of the economy during the tenure of Finance Minister Hafeez Sheikh, the International Monetary Fund (IMF) in a statement noted that structural reforms moved forward in late 2008 and 2009, (during the tenure of Shaukat Tarin) "but have been retarded or reversed in 2010 and 2011."
In 2008 and 2009, steps were taken to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalise the foreign exchange market, the IMF statement adds. Some progress has been made recently in modifying the existing general sales tax by reducing exemptions and strengthening the refund mechanism. However, this reform has been delayed and its scope has been far narrower than earlier envisaged.
Very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability, the statement argues. Further, the legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months.
IMF suggested in its statement that to make progress under the programme, economic reforms need to be reinvigorated. Real GDP growth rate in Pakistan, IMF adds, will not exceed 2.7 percent in the current fiscal 2010-11.
The statement reveals that important delays in tax and expenditure reform and the impact of the floods are expected to keep the fiscal deficit high in 2010/11. Prior to the floods, modest signs of recovery in manufacturing (mainly in the textile sector) and exports suggested that the Pakistani economy was regaining momentum. Real GDP growth is estimated to have reached 4 percent in 2009/10. However, as a result of floods, real GDP growth is unlikely to exceed 23/4 percent in 2010/11. Also, adverse security developments continue to hurt domestic and foreign investors'' confidence, while electricity shortages continue to prevent the economy from achieving its potential.
The statement said that 34-month US $11.3 billion Stand-By Arrangement (SBA) was originally approved by the IMF''s Executive Board on November 24, 2008, augmented on August 7, 2009, and extended by nine months in December 2010. The Board completed the fourth review of the programme on May 14, 2010. In addition, on September 15, 2010, the Board approved US $451 million disbursement under the Emergency Natural Disaster Assistance framework to help Pakistan manage the immediate effects of the floods.
The statement discloses that the current SBA programme aims to restore macroeconomic stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves; protect the poor by strengthening the social safety net - this is a key element of the government''s policy strategy; and raise budgetary revenues through comprehensive tax reforms to enable significant increases in public investment and social spending required for achieving sustainable growth.
According to the IMF statement, Pakistan''s economy had initially made progress toward stabilisation under the programme. Macroeconomic imbalances shrank and inflation fell below 10 percent in mid-2009. More recently, however, the budget deficit has increased, reaching 6.3 percent of GDP in 2009/10 , and inflation has been on the rise, recording 13 percent in March 2011. The external position has strengthened, the exchange rate has been stable, and the current account deficit has narrowed considerably, helped by lower import growth, higher exports, and a robust increase in workers'' remittances. Foreign currency reserves have increased from US $3.3 billion in November 2008 (before the SBA approval) to over US $14 billion at present.
The statement says that the fiscal policy has been affected by low economic activity and a difficult security environment. Raising budget revenues has been difficult, and efforts have been made to maintain fiscal discipline by eliminating non-priority spending while accommodating additional large security spending. These efforts proved initially successful, but since June 2009, the authorities have exceeded the budget deficit targets under the programme, among others, due to large additional subsidies for the electricity sector. The overrun on the fiscal deficit target at end-June 2010 reached 1.7 percent of GDP. Meanwhile, the catastrophic floods, which hit Pakistan in the summer of 2010, reduced growth and posed a further challenge to public finances by depressing budget revenues and necessitating additional spending to meet the humanitarian and reconstruction needs.
IMF suggests in its statement that reforms are needed to strengthen public finances and improve financial intermediation, and to raise economic confidence to stimulate higher savings, investment, growth and employment. Stronger public finances are needed to allow for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium term. Economic reforms will also mobilise financial support from external donors and spur greater private capital inflows.
The statement pointed out that until the economic crisis of 2008, Pakistan had enjoyed a relatively robust economic performance since 2001. Warning signs emerged in 2007 and early 2008, as inflation began to rise and external imbalances expanded. Conditions deteriorated in mid-2008 with the sharp increase in international food and fuel prices and worsening of the domestic security situation. The fiscal deficit widened, due in large part to rising energy subsidies, financed by credit from the central bank. As a result, the rupee depreciated and foreign currency reserves fell sharply. Inflation reached 25 percent in late-2008, causing harm to vulnerable social groups.