WASHINGTON: The International Monetary Fund (IMF) believes that significant further economic progress in Pakistan is within reach.

Real GDP is expected to grow by more than 4 per cent during this and next fiscal year. The fiscal deficit will further decline to 4.3pc of GDP in 2015-16.

Macroeconomic stabilisation in the country is well under way and the threat of a crisis has significantly receded.

The IMF report, released on Thursday, notes that Pakistan plans to undertake adequate further fiscal consolidation while structural reform efforts are continuing.

Possible potholes

The report on the seventh review under the extended arrangement and modification of performance criteria, however, also points out possible potholes that can derail the progress. “Much remains to be done to achieve a sustainable economic transformation,” it warns.

According to the report, Pakistan still lags behind other emerging market countries in key macroeconomic and business climate indicators. Economic growth remains below the 5-7pc annual rate needed to absorb new entrants into the labour market and achieve improvements in living standards for wide segments of society.

Public debt is still high and the tax-to-GDP ratio remains among the lowest in the world.

Significant reforms are needed to boost private investment, broaden the tax base, improve tax administration, ease growth bottlenecks, and enhance the economy’s productivity and competitiveness.

Private investment, including FDI and exports are still much below desired outcomes.

Electricity outages continue to be an important restraining factor for competitiveness and growth.

In addition, the appreciation of the rupee in real effective terms has been eroding Pakistan’s competitiveness.

Prudent monetary policy

The overall assessment, however, remains positive, noting that headline inflation has continued to decline, and advises Pakistan to maintain a prudent monetary policy stance to keep inflation expectations well anchored.

Pakistani authorities have made significant progress in addressing fiscal and balance-of-payments imbalances. Foreign exchange reserves are recovering fast, helped by decisive foreign exchange purchases in the context of tailwinds from lower oil prices.

Fiscal consolidation is on track, the government has reduced borrowing from the SBP, and efforts continue to diversify financing sources and lengthen debt maturities.

“The authorities should be commended for attaining all performance criteria and structural benchmarks under the programme for the seventh review, despite significant political and security challenges,” says the report.

Tax collection to rise

Tax revenues are slated to increase by an additional 1pc of GDP and energy subsidies will be further reduced, while continuing to protect the poor through lifeline tariffs.

Public investment spending will grow in line with projected nominal GDP growth, and social protection through the BISP will be further expanded.

Pakistan has also adopted a new comprehensive strategy to fix the still ailing power sector.

Other important structural reforms are underway in tax administration, central bank operations, the trade regime, and the transformation and privatisation of public sector enterprises (PSEs).

Reform priorities for the remainder of the programme include reinforcing the gains in economic stabilisation and addressing long-standing barriers to sustainable, strong, and inclusive growth.

Cheap oil to help energy sector

The report notes that low international oil prices have created an opportunity for Pakistan to address energy sector problems and boost reserves buffers.

“Despite some negative tax implications, the positive shock to energy prices can also be used to accelerate the reduction in electricity subsidies and to tackle the persistent problem of payments arrears in the sector,” it says.

The IMF also welcomes Pakistan’s decision to accelerate the accumulation of foreign exchange reserves, and says that continuing on this track will be important to further strengthen Pakistan’s financial resilience.

The Fund also welcomes Pakistan’s new plan to fix the power sector. It points out that further reducing untargeted subsidies that disproportionately benefit wealthy segments of society will free resources for priority spending.

Forcefully addressing arrears in the power sector will unlock existing idle generation capacity and reduce the potential drain on public resources.

The IMF advises Pakistan to continue implementing these reforms to achieve a successful outcome. “With ongoing legal challenges to power surcharges posing potential risks to the budget and efforts to fix the power sector, the authorities’ contingency plans are welcome as they mitigate these risks,” the report says.

The report notes that maintaining the momentum of other structural reforms will also be critical.

The IMF urges Pakistan to continue multi-year efforts to strengthen the tax administration and improve revenue collection.

It reminds Pakistan’s planners that strong systems for the evaluation, prioritisation, and implementation of public investment projects will be important.

Passage of the proposed legal amendments to strengthen the State Bank of Pakistan’s (SBP) independence will already address some important shortcomings, but further changes will be needed to bolster the SBP’s governance structure and autonomy.

Privatise, privatise

Privatisation should continue, building on recent successes, and the authorities’ commitment to improve or privatise ailing PSEs is particularly important.

The report also emphasises the need to continue efforts to reform the gas sector, and urges the government to focus on price rationalisation and improvements in domestic production.

On the basis of Pakistan’s performance under the extended arrangement, the IMF staff supports the authorities’ request for modifications of the end-June net international reserves and performance criteria.

Pakistan has requested the end-June 2014 calculation of the fourth review to exclude the proceeds of the $2 billion Eurobond transaction.

It also proposed that the end-June performance criteria be raised by $550 million and the end-September performance criteria be set at $1bn above the revised June target.

Published in Dawn, July 3rd, 2015

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