The Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation* with Pakistan on June 14, 2017.
Pakistan’s outlook for economic growth is favourable, the IMF said, with real GDP estimated at 5.3% in FY2016/17 and strengthening to 6% over the medium term on the back of stepped-up China Pakistan Economic Corridor (CPEC) investments, improved availability of energy, and growth-supporting structural reforms. Inflation has been gradually increasing but remains contained, the IMF team said, and the financial sector has remained sound.
However, macroeconomic stability gains made under the 2013-16 IMF Extended Fund Facility (EFF)-supported programme have begun to erode and could pose risks to the economic outlook, the IMF warned. Fiscal consolidation has slowed, with the 2016/17 budget deficit target of 4.2% of GDP (authorities’ latest projection) is likely to be exceeded, the IMF said.
The current account deficit has widened and is expected at 3% of GDP in 2016/17, driven by quickly rising imports of capital goods and energy. Foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate. On the structural front, while the successful implementation of business climate and financial inclusion reforms has continued, some renewed accumulation of arrears in the power sector has been observed, and financial losses of ailing public sector enterprises continue to weigh on scarce fiscal resources.
IMF Directors agreed** that the growth outlook remains favourable, but noted that policy implementation weakened recently and macroeconomic vulnerabilities are reemerging. They emphasised that sustained fiscal consolidation over the medium term, in line with the Fiscal Responsibility and Debt Limitation (FRDL) Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves.
To this end, Directors recommended mobilising additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies, and increasing priority social spending. They suggested strengthening the national fiscal federalism framework and public debt management.
Directors stressed the importance of maintaining a prudent monetary policy stance to preserve low inflation, and of further advancing financial sector reforms to continue strengthening resilience and support financial deepening. They welcomed the progress in fostering financial inclusion and implementing the business climate reform strategy, and encouraged the authorities to press ahead with these efforts. Directors also recommended further strengthening social safety nets.
*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
**At the conclusion of the discussion, the MD, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here.