KARACHI: In a wide-ranging conversation with Dawn, the Resident Representative of the IMF to Pakistan followed up on the fund’s warning that the macroeconomic stability earned through stabilisation in the past three years needs to be used to make these gains more permanent.

“The moment of opportunity earned through the stabilisation programme is a hard-earned opportunity to advance deeper structural transformation of the economy to ensure future stability,” Tokhir Mirzoev said, cautioning that present trends could undermine macroeconomic stability “if the reforms do not continue”.

Key trends he pointed towards were widening of the current account deficit and a still vulnerable fiscal framework. “Realising the budgeted revenue will require significant effort,” he emphasised, while the decline in reserves and the growing current account deficit were sources of concern.

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“Currently the economy is flying on one engine,” he says, “and that engine is importing sectors, while the second engine —exports — is lagging. Greater exchange rate flexibility will help rectify this imbalance, but beyond that, the government will need to engage with the exporter community more proactively to develop the plans with which to revive exports.”

“Adding more generation capacity to the system is crucial,” he agreed when asked about the nature of the reforms that need to be undertaken, “but more generation without reforming a leaky distribution system could add to the circular debt and may compromise long-term sustainability of new energy projects. In this context, finding a permanent solution to power sector arrears will be critical in the period ahead.”

Mr Mirzoev is currently on rounds meeting with business and opinion leaders around the country following the latest Article IV report released by the fund this week. “One important message of the report” he says, “is the need to rebalance the federal-provincial fiscal relations. There are important gaps in the devolution of resources and responsibilities to the provinces under the last NFC award”. That accord has created a mismatch between provincial government incentives and responsibilities, he emphasised. “The provincial governments should be empowered, but the devolution of powers needs to be better aligned with the devolution of resources; and the interests of the provinces could be better aligned with those of the centre and the broader national objectives.”

The outcome of this mismatch, he points out, is a fiscal system that is unbalanced, insufficiently flexible, and less prepared to absorb large shocks. In addition, provinces have a say in key national policy decisions, but often do not bear the equal obligation when it comes to funding such policies.

It is important to take appropriate steps to address the growing imbalances early on, he said, and not allow the economy to come back full circle to where it was before the “moment of opportunity” was attained. He refrained from speaking of or pointing towards a potential balance of payments crisis in the future, preferring to say that a “soft adjustment can be engineered given the right reforms”. He declined to get specific about the implications such an adjustment could have on the growth rate.

“Reserves are still adequate for the foreseeable future, and there is still some debt carrying capacity, so the situation is not exactly dire. But its recent trend is worrisome and to reverse this will require some concerted effort.”

Published in Dawn, July 22nd, 2017