Said to be “based on the solid progress” on the reform agenda envisaged in the ongoing EFF programme, IMF had disbursed a tranche of $501 million last month but did not say much about the fulfilment of the performance criteria at that time. On 7th April, 2015, however, it released its observations on the assessment of the economy under “sixth review under the extended arrangement and modification of performance criteria” somewhat belatedly on its website which says that macroeconomic picture of the country is improving. Real GDP is projected to grow by some 4.3 percent during FY15. A plunge in oil prices had reduced the import bill and improved the trade balance but exports weakened due to lower cotton prices and the loss of competitiveness from real exchange rate appreciation. Remittances continue to increase at double-digit rates and financial account has improved, supported by recent international Sukuk issue and multilateral disbursements. The rupee gained 1.2 percent against the dollar over the last quarter and the real effective exchange rate (REER) appreciated by 10.6 percent since the onset of the programme. Headline inflation dropped to 3.9 percent by January, 2015, with core inflation easing to 7.0 percent. Going forward, slippages in policy implementation could discourage investment, weaken growth prospects and delay needed structural reforms. Challenging political and security conditions could disrupt economic activity, discourage investment and undermine fiscal consolidation. A protracted period of slower growth in key advanced economies could impair exports and hurt remittances. A persistent appreciation in exchange rate could erode export competitiveness. On the positive side, low oil prices could help improve the current account balance, ease energy supply bottlenecks and improve macroeconomic performance.
Jeffrey Franks, the IMF’s outgoing mission chief for Pakistan, also seemed to be quite optimistic about the prospects of the economy. He said that Pakistan was on the verge of balance of payments crisis when it approached the IMF for support in 2013 and that crisis had been averted. Foreign exchange reserves which had declined to perilously low levels are now rebounding. Fiscal deficit, which was extremely large at over 8 percent of GDP in FY13, was on track this year to get down below 5 percent of GDP. Pakistan was also tackling costly and inefficient electricity subsidies which were expected to fall from 2.0 percent of GDP to 0.7 percent this year. At the beginning of this year, government had eliminated a significant number of SROs and another batch of SROs will be eliminated in the upcoming budget. Growth in GDP was, nonetheless, not enough to substantially improve income levels because of high population growth rate.
The latest observations on the economy of Pakistan indicate that the IMF is, to a large measure, putting a positive spin on the macroeconomic picture of the economy to justify the release of its latest tranche. Of course, there was improvement in some indicators but it was largely due to certain favourable factors and not because of the implementation of fundamental structural reforms which were necessary to place the economy on a sustainable path of development. For instance, current account balance and fiscal deficit of the country improved due to CSF inflows, issuance of Sukuk bonds, a marked decline in international commodity prices including oil’s while the government had not made much progress in broadening or deepening the tax net. Consistent sharp increases in home remittances were of course a bonus to support the balance of payments which may or may not last. Exports have declined and trade balance is widening due to low productivity, dismal level of foreign investment and above all lack of competitiveness of Pakistani products abroad due to host of structural issues. Overvaluation of the Pak rupee has contributed to the easing of inflationary pressures though a decline in oil and commodity prices also helped decelerate the rate of inflation. Saving and investment rates in the economy are still too meagre to raise the GDP growth, create more employment and reduce poverty level. The most important failure is in the area of fiscal policy where the necessary political will is lacking to improve tax collections. Only about one in 200 citizens files income tax return and most of the legislators, living in posh localities and driving big cars with lot of security people, do not pay income tax according to their income levels. The amount of circular debt continues to mount. In an environment like this, it is vital for the IMF to keep stressing the dire need of reforms than highlighting the achievements which came on the back of further borrowings or certain favourable exogenous factors. The logic of the remarks made by Franks is also obvious. He wanted to take credit for a job which is yet unfinished and he will not be on the job when the final call is made.
We are afraid that the IMF would continue to paint a rather overly optimistic picture of the economy and dole out the money without forcing the authorities to stick to the reform agenda as long as the country remains in global community’s good books, particularly the US. The government of Pakistan, however, needs to take a long-term view of the economy itself, contain the twin deficits within manageable limits and implement other necessary measures such as development of Debt Capital Market, higher availability of credit to SMEs, agriculture, low cost housing by removing the obstacles, eg, introduce and implement a foreclosure and bankruptcy law in letter and spirit. These reforms will place the country on a sustainable path of development and are easier to undertake so long as the exogenous factors are favourable and international community is supportive. We know that this is a tall order but the publicity of premature success would breed complacency and again force the country to look to outside sources of finance when the fortunes of Pakistan are less starry. In our view, this is a good time to try to move to a situation where the crutches of the IMF are no more needed and the country could be economically independent.
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