IMF says Pakistan’s economic situation is fragile
Thursday, October 09, 2008
By Mehtab Haider
ISLAMABAD: Estimating Pakistan’s financing gap at $7 billion in the current fiscal year, the International Monetary Fund (IMF) has said the country’s macroeconomic situation is very fragile and further significant losses in reserves would make it vulnerable to a crisis.
IMF Macroeconomic Assessment Letter about financial health of the country’s economy given to the Asian Development Bank on September 28, which paved the way for the release of $500 million, states that IMF’s staff preliminary projection for 2008-09 based on a continuation of the prevailing monetary policy stance, expected external financing and revised oil prices, saw external current account deficit of $14 billion (7.7 per cent of GDP).
With capital inflows of about $7 billion, the IMF staff estimates external financing gap of $7 billion. “Given the difficulties involved in forecasting capital inflow in an unsettled macroeconomic environment, this financing gap is subject to a high degree of uncertainty,” the fund further states.
The fund staff believes that tax revenues should be increased by at least 3-4 per cent of GDP over the medium term (from 10pc of GDP in 2007-08) by broadening the base of the general sales tax to services, taxing commercial agriculture under the income tax, eliminating other tax exemptions and significantly strengthening tax enforcement. On prospects of real GDP growth for 2008-09, the IMF says that GDP growth is expected to slow further to about 4.5 to 5pc in the current fiscal year while average inflation is projected to increase to 16 to 17pc owing in part to the envisaged pass through higher international prices of energy and food.
The country has set inflation target at 12pc for 2008-09. Recently, the country’s authorities specified their policy plans for the current fiscal year and stressed their commitment to addressing macroeconomic imbalances and putting the economy back on a sustained path.
Moreover, following the recent increases in the discount rate and the adoption of policy of greater exchange rate flexibility, the authorities indicated that the SBP stood ready to take further actions in this direction, as needed. The authorities also committed to meeting the government’s domestic financing needs through market based instruments and ensuring that both borrowing from the SBP is zero on a net basis at the end of each quarter, the IMF noted.
The authorities have taken some measures to by adjusting fuel and electricity prices as well as slowing down the development spending, further measures are required to achieve the target of reducing the fiscal deficit to 4.7pc of the GDP.
On the expenditure side, the IMF says, the authorities need to move ahead with planned increase in electricity tariff and with larger than budgeted reduction in other outlays to offset the impact of potentially higher interest rates on the government’s debt servicing.
This will require removing other subsidies, containing other non-interest current expenditures and carefully prioritizing development spending, said the IMF.
The authorities should also ensure the implementation of targeted social protection mechanism to cushion the impact of lower subsidies on vulnerable groups.
Regarding revenue generation, the IMF says a stronger than envisaged effort is needed to broaden the tax base by eliminating some tax exemptions.
On the monetary side, the IMF mentioned the recent increases in interest rates have been insufficient to stem reserve losses and eliminate the central bank financing of the government.
If the SBP follows guidelines outlined by the IMF, rupee will further depreciate against dollar in coming days, said market analysts. The IMF says looking beyond 2008-09, a further fiscal effort, together with continuation of tight monetary policy and exchange rate flexibility, will be required to notch a sustainable current account position and bring down inflation.
In particular, strong tax and policy administration measures will be necessary to further reduce the fiscal deficit.