The International Monetary Fund (IMF) has projected Pakistan’s real GDP growth at four percent at factor cost for 2021-22 against the five to 5.5 percent projected by the government.
The Fund projection for growth in the current year may rise after rebasing as the uploaded data on its website, after the Executive Board meeting held in Washington on 2nd February, estimates GDP growth at 3.9 percent for 2020-21, while after rebasing it is given at 5.57 percent.
Inflation is expected to pick up this year before gradually slowing down, so stated the official IMF handout projecting it at 10.2 percent inflation rate for year end – 1.2 percent higher than the budget projection. The current account deficit has been projected at -4.0 percent of the GDP by year end, while it was estimated at -4.9 percent in 2018-19.
The Fund has projected revenue and grants at 15.9 percent of the GDP for 2021-22, expenditure at 22.8 percent of the GDP, budget balance including grants at -6.9 percent of the GDP (0.6 percent higher than budgeted), primary balance, excluding grants at -1.3 percent of the GDP, total general government debt excluding the IMF obligations at 78.9 percent of the GDP, external general government debt at 27 percent of the GDP, domestic general government debt at 51.9 percent of the GDP, general government debt including the IMF obligations at 82 percent of the GDP, general government and government guaranteed debt (including the IMF) at 86.7 percent of the GDP for 2021-22.
The Fund has projected broad money at 15.8 percent and private credit at 16 percent for 2021-22. The foreign direct investment at 0.8 percent of GDP, gross reserves at $21.211 billion accounting for3.2 months of next year’s imports of goods and services against 2.7 last year and only 1.7 months in 2018-19. Total external debt is estimated at 40.6 percent of the GDP for 2021-22.
The IMF in its official statement issued after the Executive Board meeting warned that the Pakistani economy has continued to recover despite, the challenges from the Covid-19 pandemic, but imbalances have widened and risks remain elevated. Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms, it added.
The Executive Board of the IMF concluded the 2021 Article IV Consultation with Pakistan. The Executive Board also completed the sixth review under the Extended Fund Facility (EFF) for Pakistan, allowing the authorities to draw the equivalent of SDR 750 million (about US$1 billion). This brings total purchases for budget support under the program to SDR 2,144 million (about US$3 billion, or 106 percent of quota).The Executive Board also approved the authorities’ request for waivers of applicability and non-observance of performance criteria.
The EFF was approved by the Executive Board on July 3, 2019 for SDR 4,268 million (about US$6 billion at the time of approval, or 210 percent of quota). The program aims to support Pakistan’s policies to help the economic recovery from the COVID-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.
The statement further noted that Pakistan entered the Covid-19 pandemic with strengthened buffers, following the approved EFF program. A strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock. At the same time, external pressures also started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate, which also reinforced domestic price pressures.
The recent policy adjustment was appropriate to address these challenges and maintain economic stability. The economy is set to continue recovering in fiscal year 2022, with real GDP growth projected at four percent, while inflation is expected to pick up this year before gradually slowing down. The IMF has projected 10.2 percent inflation rate for year end.
Continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term.
However, Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms. Strengthening the medium-term outlook hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy. To this end, increased focus is needed on measures to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change.
Following the Executive Board’s discussion on Pakistan, Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement:
“The Pakistani economy has continued to recover despite the challenges from the Covid-19 pandemic, but imbalances have widened and risks remain elevated. The authorities’ recent policy efforts to strengthen economic resilience are welcomed. Timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth.
“The authorities have taken important measures to strengthen fiscal policy and put public finances on a sounder footing. Along with careful spending management, revenue mobilization will help to create space for much-needed spending on infrastructure and social protection, while improving debt sustainability. Maintaining the momentum on the reform of personal income taxation and harmonization of general sales taxes is essential. Broader reforms in tax administration and public financial and debt management are expected to further improve the fiscal framework.
“The adoption of amendments to the central bank Act is a welcome step toward strengthening its independence to pursue its mandates of price and financial stability. The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy would help to anchor inflation. Closer oversight of financial institutions to ensure they remain well capitalized would help to maintain financial stability. Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild reserves. The authorities are committed to removing the existing exchange restrictions and multiple currency practices when BOP conditions stabilize.
“Strong efforts to advance electricity sector reform are needed to restore the sector’s financial viability and address adverse spillovers on the budget, financial sector, and real economy. The IFI-supported Circular Debt Management Plan (CDMP) will help to guide the planned management improvements, cost reductions, alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.
“Ambitious steps to remove structural impediments and facilitate structural transformation remain essential to boost growth and job creation and improve social outcomes. The authorities are focused on state-owned enterprises reform, fostering the business environment and reducing corruption, promoting financial inclusion; and addressing the challenges posed by climate change.”
This report was first published in Business Recorder on February 4, 2022.