IMF seeks fiscal measures to support economic resilience

ISLAMABAD: The International Monetary Fund (IMF) projected the country’s debt to GDP ratio at 69.1 percent for the current fiscal year of 2016/17, advising the government to take fiscal measures in order to maintain economic resilience over the medium-term.  

“Sustained fiscal consolidation over the medium term, in line with the FRDL (Fiscal Responsibility and Debt Limitation) Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves,” the Washington-based lender said in a latest statement after the conclusion of Article IV consultation’s meeting with Pakistan’s authorities.

The government put debt to GDP ratio at 58.9 percent for 2016/17.

The government always claimed that its definition of debt is in line with the IMF’s projection, but there is a clear difference in the projections.

The Fund said policy implementation weakened recently and macroeconomic vulnerabilities are reemerging.  It recommended mobilising additional tax revenues by broadening the tax base and strengthening tax administration. 

IMF called for enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies and increasing priority social spending. 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, it said.

The lender also recommended strengthening the national fiscal federalism framework and public debt management.

It said macroeconomic stability gains made under the 2013-16 extended fund facility (EFF)-supported program have begun to erode and could pose risks to the economic outlook. 

“Fiscal consolidation has slowed, with the 2016/17 budget deficit target of 4.2 percent of GDP (authorities’ latest projection) likely to be exceeded,” it added. “The current account deficit has widened and is expected at 3 percent of GDP in 2016/17, driven by quickly rising imports of capital goods and energy.” 

Last year, the country exited from IMF’s $6.3 billion EFF program.  The first repayment will start in 2018 and the repayment schedule extends till FY 2025-26.

IMF said the FY 2017/18 budget aims at further gradual consolidation, albeit at a slower pace than targeted under the FRDL Act, and will likely require additional revenue measures in light of recent revenue underperformance. 

The country’s foreign reserves, excluding gold and foreign currency deposits of banks held with the State Bank of Pakistan, was projected at $18.518 billion by June-end as against $6 billion by 2012-13.

Yet, IMF said foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate.

“Key external risks include lower trading partner growth, tighter international financial conditions, a faster rise in international oil prices, and over the medium term, failure to generate sufficient exports to meet rising external obligations from large-scale foreign-financed investments,” it added.  The Fund, however, remained bullish on economic resilience, supporting the government’s growth projection of six percent on Chinese-backed infrastructure developments. 

“Pakistan’s outlook for economic growth is favourable, with real GDP estimated at 5.3 percent in FY 2016/17 and strengthening to 6 percent over the medium term on the back of stepped-up China Pakistan Economic Corridor investments, improved availability of energy, and growth-supporting structural reforms,” it said.   The Fund said the debt to GDP ratio will come down to 67.6 percent in the next fiscal year. —Mehtab Haider