Pakistan and International Monetary Fund (IMF) remained poles apart in their assessment of the country’s economy. Islamabad took an optimistic view of the external and fiscal sector. While the global lender cautioned about emerging challenges that are posing risks to the favorable outlook.
The IMF once again sought significant devaluation of the Pakistani rupee against the US dollar to curb external sector challenges. As it said that the foreign exchange reserves have already fallen “below a comfortable level”.
On Thursday, the IMF released on Thursday the Article-IV consultation report on the state of the economy. That report showed that there was a disagreement and conflict between it and Pakistani authorities over many issues. They had divergent views on the external sector vulnerabilities. They are slowing fiscal consolidation and structural reforms.
Pakistan’s Effective Exchange Rate is 10 – 20%
The IMF staff stressed that reversing the recent decline in foreign exchange reserves. And then allowing for greater exchange rate flexibility is needed to rebuild external buffers, which are below adequate levels.
It said that Pakistan’s real effective exchange rate is 10 to 20% and is overvalued. It requires and need “greater exchange rate flexibility, fiscal adjustment, and structural reforms” to balance.
The fund advocated that greater exchange rate flexibility would strengthen Pakistan’s competitiveness. This has been affected by real effective exchange appreciation.
The IMF said that the exchange rate continued to remain stable in competition against the US dollar. This exchange rate is supported by the State Bank of Pakistan’s (SBP) foreign exchange interventions. After that it is further appreciated in real effective terms 6% during this fiscal year.
According to the IMF assessment, Pakistan’s real effective exchange rate appreciated 18% over the past three years, according to the IMF assessment.
It advised that “Resumption of accumulation of reserves – including through allowing downward exchange rate flexibility is needed to more strengthen buffers while also supporting competitiveness,”
Prudent monetary policy and greater exchange rate flexibility will be used to preserve low inflation and re-build external buffers.
Pakistan is Now a $300 Billion Economy
Pakistan is now a $300-billion economy. The IMF said that Pakistani authorities’ own assessment that is suggested to have lower currency overvaluation. Moreover, Pakistan viewed reserves as adequate these reserves cover more than three months of imports.
IMF programme in September last year after an end of the $6.2 billion, Pakistan’s external account has deteriorated at a rapid pace. That exposed the hollowness of reforms under the three-year programme. The current account deficit has already widened to $10.6 billion. That is more than double the assessment of the IMF and Pakistan for the fiscal year ended on June 30.
The IMF said that on the debt issues financial account of Pakistan showed reliance.
It added that “The pace of fiscal consolidation has slowed, public debt remains high, and mobilization of tax revenue needs to be further strengthened,”
The IMF said that external vulnerabilities have increased and there is an extensive current account deficit. Rising medium-term external repayment obligations linked to the (CPEC) and other large investment projects.
Since the end of the EFF-supported programme, Foreign exchange reserves have declined to $16.1 billion and “remain below comfortable levels”. The $16.1 billion reserves are correct to finance only 3.4 months of imports.
These reserves are included $3.6 billion that the SBP obtained through derivative position. The IMF said that $3.6 billion could put more pressure on reserves.
Fiscal Consolidation Slowed in 2016-2017
In Pakistan, The IMF assessment showed that fiscal consolidation slowed in the fiscal year 2016-17. It included that the fiscal year 2017-18 budgets are also subject to risks. Reaching the deficit target will likely require more revenue measures during the course of the year.
The IMF said that public debt and fiscal deficit are projected to be above the ceilings set in the FRDL Act. It included that Pakistan will face increasing government and CPEC-related external repayment obligations. It external financing needs are projected to increase to nearly 7.5% of GDP over the medium-term.
That is highlighting the need for macroeconomic and structural policies supporting competitiveness. Domestic risks could arise from security issues. Fiscal pressures could rise during the period leading up to the mid-2018 general elections, and growth-supporting reforms could slow, according to staff.
On the structural front, progress in electricity sector reforms has been mixed and financial losses of ailing public sector enterprises (PSEs) have continued. The IMF staff stressed the need to strengthen DISCOs’ performance and adjust end-consumer tariffs to reflect higher input costs.