WASHINGTON/DUBAI - Pakistan’s economy is demonstrating significant improvement, with growth rate likely to be higher than previous estimates, the International Monetary Fund said Sunday.
In a statement issued in Washington after at the conclusion of talks between the IMF Staff and a top-level Pakistani delegation, the Fund also acknowledged Pakistan’s progress with reforms.
Pakistan’s Finance Minister Ishaq Dar, State Bank of Pakistan (SBP) acting Governor Ashraf Wathra, Finance Secretary Dr Waqar Masood and other senior officials met with the IMF team led by Jeffrey Ranks, in Dubai and held productive discussions, it said.
"The IMF mission...is encouraged by the overall progress made in pushing ahead with policies to strengthen macroeconomic stability and reviving economic growth," Jeffrey Franks told a joint news conference with Pakistan's finance minister after their consultations.
The IMF's executive board is tentatively scheduled to consider in late March whether Pakistan will obtain the third tranche of its IMF loan programme, Franks said. He said the IMF was not imposing privatisation on Pakistan but was very supportive of the process.
"The authorities' reform programme remains broadly on track with the government meeting all of the quantitative performance criteria by end-December 2013," Franks said. He added that two exceptions were targets for the central bank's net swap/forward positions and the ceiling on government borrowing from the central bank, but that authorities had reaffirmed their commitment to adopt corrective action.
Franks said Pakistan was still in a very difficult economic situation but that the IMF saw signs of improvement as reforms in the electricity sector seem to be bearing fruit, with electricity shortages and unscheduled load-shedding declining. Decisive efforts to broaden the tax net through elimination of tax exemptions and loopholes granted through statutory regulatory orders are critical to the future of Pakistan's economy, the IMF also said.
Last September, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years. In return, Pakistan must make good on reforms such as a longstanding promise to privatise loss-making state companies. The IMF raised Pakistan's gross domestic product growth forecast to 3.1 percent for the fiscal year 2013/14, which started in July, from the previous prediction of 2.8 percent, because of better performance in services and manufacturing.
Dar described the country's economic growth as ‘encouraging’, adding tax collection had risen 26 percent in January and that the IMF seemed to be more or less satisfied with the central bank's net asset reserves.
The IMF and Pakistan differ on inflation expectations, with the Fund projecting a 10 percent rate in the current fiscal year. The Washington-based body encouraged Pakistan's central bank to be vigilant in coming months to guard against a rebound of inflation. It would like to see price growth in a 6-7 percent range on a sustainable basis, Franks said.
Dar admitted the government expects inflation to rise above its current 7.9 percent but that it will not hit double digits. "Based on the moderate rate of inflation of 7.9 percent during January 2014, we expect that inflation for the entire fiscal year would remain within a single digit." The deficit, which was roughly 9 percent of gross domestic product in 2012, needs to be brought down to around 3.5 to 4 percent by the end of the three-year program. Dar said the deficit for the first half of the fiscal year stands at 2.2 percent.
Pakistan is "well on track" in the process of issuing a eurobond, and expects the process to be completed by the end of March, the minister said. He said he did not expect the cost of the issue to be over 6 percent, and that it should be around the "usual" benchmark price. "There is a huge demand for this bond and it may be followed by an Islamic bond or sukuk. I'm not sure because it depends on the interest - but so far we are very positive."
Dar said the government is following "very strict austerity measures" that have not been easy to make. "I think we have taken very painful measures, which were partially politically unpopular, but I think they were needed by the country and it has not only changed the direction of the economy... it has put us on the road of recovery and stability," he said.
About the pipeline project between Iran and Pakistan, Dar said IP gas project was still on hold due to financial constraints on the Iranian side. The ball was in the Iranian court, he said, adding “There were no financial flows for the pipeline.” He said Pakistan welcomed the nuclear deal reached between Iran and the six world powers.
The Washington statement said: “Pakistan’s economy is showing signs of improved economic activity. Services and manufacturing are driving better-than-expected GDP growth, as reforms in the electricity sector seem to be bearing fruit with electricity shortages and unscheduled load-shedding declining. Led by large scale manufacturing and service sectors, growth is picking up and is now expected to reach about 3.1 percent for FY2013/14 as a whole, compared to the earlier estimate of 2.8 percent.”
Moreover, the statement said Islamabad’s fiscal performance continued on track in the second quarter of 2013/14. On the external side, while the SBP has continued its efforts to rebuild reserves, and the foreign exchange market has stabilised, pressures on the balance of payments are likely to persist for some months, it added.