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Political polarisation, security challenges pose risks to growth: IMF

By Mehtab Haider
July 14, 2017

ISLAMABAD: International Monetary Fund (IMF) on Thursday warned Pakistani authorities of economic risks stemming from political polarisation and security challenges, reiterating the importance of inclusive policies to realise growth outlook. 

“Domestic risks could arise from political polarisation in the pre-election period and security issues,” the Washington-based lender said in a report that concluded the Article IV consultation with Pakistan.

The Fund said fiscal pressures could rise during the period “leading up to the mid- 2018 general elections, and growth-supporting reforms could slow.”

“While security conditions have improved over the past few years, a renewed deterioration could affect confidence, investment, and economic activity,” it added. “Domestically, risks include deterioration in security conditions and potential pressures on policy implementation ahead of the mid-2018 elections.”

Key external risks, the Fund said, include lower trading partner growth, tighter international financial conditions, faster rise in global oil prices and, over the medium term, failure to generate sufficient exports to meet rising external obligations from foreign-financed investments. 

IMF, however, said Pakistan’s growth outlook is favourable with real GDP growth estimated at 5.3 percent in the fiscal year of 2016-17 and strengthening to 6 percent over the medium-term on the back of stepped-up China-Pakistan Economic Corridor (CPEC) investments, better energy availability, and growth-supporting structural reforms.

“To realise the favourable growth outlook, priorities include strengthening macroeconomic resilience and generating higher and more inclusive growth,” it said. “The FY 2017/18 budget is subject to risks and reaching the deficit target will likely require significant additional revenue measures.” 

The IMF advised that gradual fiscal consolidation should continue through the medium term to address debt-related vulnerabilities.

“Prudent monetary policy and greater exchange rate flexibility will be key to preserve low inflation and re-build external buffers.”

The Fund said macroeconomic risks have begun to re-emerge since the end of the extended fund facility (EFF) programme. It said long-standing challenges remain there.

IMF said the pace of fiscal consolidation has slowed. “Public debt remains high, and mobilisation of tax revenue needs to be further strengthened.” 

It said external vulnerabilities have increased with a widening current account deficit and rising medium-term external repayment obligations linked to the CPEC and other large investment projects.

“Foreign exchange reserves have declined since the end of the EFF-supported program and remain below comfortable levels,” it added.

The Fund further said private investment and exports remain low to support higher private-sector led growth and catalyse needed job creation. Unemployment is at 5.9 percent (10.5 percent among youth and 9.5 percent among women) and the informal economy is large. 

“Despite significant progress over the past two decades, poverty remains high at about 30 percent in 2013 (9 percent based on the 2001 poverty line), inequality slightly declined but remains sizable, and priority social spending, although having increased significantly, needs to be further enhanced,” it advised.

The executive board said there has been progress in implementing staff’s policy recommendations from the 2015 Article IV consultation and subsequent reviews of the EFF-supported program, although recent slippages have resulted in slower fiscal consolidation and a decline in reserves.

It said Pakistani authorities broadly shared the Fund staff’s assessment. They expected growth to accelerate to 7 percent in the medium term supported by strong CPEC related investments, favourable second-round effects from better infrastructure and energy availability, and an improved security environment. 

They also expected a moderately smaller medium term current account deficit, assuming a more pronounced slowdown in import growth and a stronger recovery in exports and remittances. 

IMF further said structural reforms to support higher and more inclusive growth should focus on ensuring a financially sound and growth-supporting energy sector, restructuring and attracting private sector participation in public sector enterprises to reduce financial losses and related fiscal costs and vulnerabilities, bolstering social protection, strengthening the business climate and governance, and fostering financial deepening and inclusion.   

The Fund said reforms in electricity sector led to mixed results. Circular debt was building up, while “financial losses of ailing public sector enterprises have continued.”