As expected, the IMF review has been successful. Pakistanis witnessed smooth sailing through a Fund review after a long time. The staff team came on time and finished the review before the clock ran out. The press release was encouraging where IMF applauded the authorities and expects inflation to recede. However, the Fund is concerned about the significant external risks.
This is the same IMF team which was very unhappy last year, and now they seem to be satisfied by the efforts of the authorities. This implies that the IMF thinks that the caretakers are doing a better job of managing policy framework. One unmentioned risk which could be in minds of the staff team is of reversion to populous short term polices and gimmickry after the upcoming elections from an elected government.
“A nascent recovery is under way”, has been aptly pointed out by the IMF. The implementation of the budget and timely energy price revision has lowered the external and fiscal pressures. The good omen is that inflation is likely to decline in coming months due to modest demand and receding supply constraints. Here, IMF thinks that import restrictions are waning off. Perhaps, there is no need to restrict supply as demand has receded by an even stronger quantum.
One important observation from the Fund has been the acknowledgement that increased regulatory and law enforcement has helped normalize imports and helped buildup reserves, as well asforex payments. Here,the Fund is applauding the crackdown on smuggling and flurry of inflows last month which helped SBP to reduce its forward liabilities by $1 billion and has created space for banks to pay part of pending dividends.
However, lately the informal market is back in action and dollar dealing in illegal market is happening at 3-4 percent premium to the interbank market. Now the IMF review is done. It is time to refresh the crackdown. And that can help sustain the currency in the next few months.
On monetary policy, there is perhaps no pressure of any further rate hike. The Fund sees tight policy in work and may not appreciate premature decline in the policy rate as there are significant external risks that include upward risk in commodity prices due to geopolitical tensions. It is wiser to lower the interest rates once headline inflation comes down from the prevailing policy rates. Thus, a 2-4 percent decline in rates cannot be ruled out by June, and markets are already pricing in the secondary market yields.
The overall fiscal and external progress is good. The concerns about currency manipulation have perhaps receded. The inflation outlook is better. The energy sector pricing reforms are pacing up. Perhaps a lot more is warranted in the power sector. All eyes are on the next programme, and for that realization of friendly countries investment and promised commitment is imperative.