Economic recovery hopes revived?

It is not unusual that once an international donor like IMF bails out a country then the perceptions about it starts to change. Same has happened with Pakistan as the IMF has now placed Pakistan in the list of countries that are now beginning their journey towards economic stability and will soon become financially viable.

Though the outlook described Pakistan to be on road to recovery but this impression may certainly not be close to reality as it was just weeks before that IMF along with all credit-rating agencies were, if not blatantly negative, but deeply skeptical about such a prospect.

Pakistan was then described as facing tremendous difficulties in securing enough money to retire its debt and it was quite widely known that a sovereign default was hovering over the country. Almost everyone was critical of the way Pakistani economy was managed and it was generally agreed that the chances of a credible turnaround for the economy may not be possible in short or midterm period and that it may take considerably longer than estimated.

It was also repeatedly pointed out that Pakistan may not be able to obtain financial assistance from the quarters it was getting it from previously and its financial position may resultantly become extremely untenable.

This highly worrying commentary about Pakistani economic situation suddenly transformed into something pretty hopeful and most of the doubts expressed before just disappeared. In this context the IMF has issued a reappraisal of Pakistan’s economy and this 120-page document describes the macro-economic outlook of the country in quite a detail.

It mentioned that assuming sustained policy and reform implementation and adequate financial support from multilateral and bilateral partners, growth is expected to gradually return to its potential, 5 per cent, over the medium term.

The reappraisal added that growth was likely to pick up moderately in the current fiscal year and reach 2.5 per cent. This assumption goes against the grain of the earlier assessments that did describe the future growth of the country in terms as given in the current reappraisal.

It invites skepticism when viewed in the backdrop that all essentials of the economy are just the same as they were few weeks earlier and considering that a recovery simply doubling the rate of growth in the medium term may defy any notions of rational assessment.

By the look of things it appears that an unnatural drift is adhered to that may actually prove more harmful than beneficial for the economic prospects of Pakistan.

It is only last week that the IMF board approved a $3 billion nine-month standby arrangement (SBA) for Pakistan in order to support the authorities’ economic stabilisation programme that entailed that the bailout package will contain an amount of $2.25bn Special Drawing Rights (SDRs) known as reserve funds that the institution credits to the accounts of its member nations that is equivalent to about $3 billion or 111% of Pakistan’s quota.

The percentage appears quite surprising as it does not commensurate with the current economic performance of the country’s economy. This position in tacitly reflected in the IMF’s observation that although base effects from post-flood recovery would provide a boost, especially to the agriculture and textile sector yet unwinding of the tight management of imports will take time to percolate through the economy and continuing external challenges and the need for tight macro policies will limit the recovery.

This point makes the imports as the central issue in this respect without clarifying how the balance of payment issue would be solved except toning down the high level of imports that are draining the country’s resources.

The unrestrained imports also suppress the inventive spirit of the country’s productive potential and results in consistent dependence upon imported facilities for economic growth.

However, the IMF also commented upon inflation stating that headline inflation was expected to remain lower from June onwards due to the base effects from last year’s increase in fuel and electricity prices and diminished contributions from food items.

Price pressures are projected to remain elevated including as a result of the much-delayed monetary tightening, thus average headline inflation is expected to remain above 25 per cent in FY24, with end-of-period inflation falling below 20 per cent only in the fourth year of financial year-24.

Likewise, core inflation is set to recede only very gradually in FY24 on account of elevated inflation expectations and the necessary tightening of policies operating with a lag. The reappraisal however pointed out that the deceleration of headline inflation was set to continue in the next fiscal year and end-of-period inflation would fall to the single digits only in the middle of the fiscal year 2025-26.

As far as the fiscal outlook was concerned the IMF observed that the fiscal space has been severely depleted and substantial vulnerabilities remains. It recommends that small primary surpluses should be maintained in the coming years with strong revenue efforts to create space for priority social and development spending and to strengthen debt sustainability.

It pointed out that without such efforts the fiscal and debt position will remain fragile and could undermine macroeconomic stability. Meanwhile, the lender said it saw the current account deficit (CAD) increasing to around $6.5 billion in the current fiscal year with the recovery in exports and imports. It noted that the CAD would have to remain moderate at around 2% of GDP over the medium term, commensurate with projected official and capital flows and efforts to rebuild reserves.

The IMF also said that risks to debt sustainability had become more acute due to the scarcity of external financing and the large gross financing needs that would persist over the coming years further narrowing the path to sustainability.

The international lender then came on to the crux of the issue and suggested measures to be taken in future. It pointed out that broad-based reforms would have to continue to improve the country’s fiscal framework such as strengthening revenue administration, enhancing public financial management, strengthening spending transparency and improving debt management.

It went on to say that strengthening social spending remained critical to increase the country’s growth potential, catch up with peers’ level of socioeconomic development and protect the most vulnerable. It suggested that fiscal space should be created for substantially ramping up social spending, notably throughout more resolute revenue mobilisation from the more affluent parts of society.

It said the government should persevere in its administrative efforts to keep the Benazir Income Support Programme running and updated.

Boosting structural reforms remains key to not only laying the foundation for strong and resilient growth but also create opportunities for all Pakistanis, including the middle class, youth and women. Further, it said that a tighter monetary policy was critical to reduce inflation, re-anchor expectations and support external sector rebalancing through the exchange rate.

At the same time, improving the monetary transmission and the monetary operation framework will be important. Regarding reducing external imbalances and rebuilding foreign reserves, the IMF said it required permanently ending administrative controls and actions to manage the current account and returning to a market-determined exchange rate.

Heightened monitoring of financial stability risks and efforts in support of governance needed to be sustained and strengthened through safeguarding financial sector soundness and ensuring the effective implementation of the Financial Action Task Force’s Anti-Money Laundering/Combating the Financing of Terrorism measures.

The IMF also noted that restoring viability to the energy sector required urgent and
tangible reform.