IMF posts positive picture of Pak economy with inflation decline

ISLAMABAD   -   The International Monetary Fund (IMF) has noted that a gradual economic recovery has increasingly taken hold and inflation has declined substantially in recent months, though remaining well above the target. The SBP has taken advantage of increased inflows, easing external pressures, and the moderation of the current account deficit to begin rebuilding FX reserves. Fiscal performance has also improved, with the government posting a large primary surplus. This overall satisfactory performance suggests that unwavering and consistent policy implementation can bring positive results, rebuild confidence, and support economic recovery, the IMF noted in its report released after completion of Stand-By Arrangement (SBA).

Pakistan’s fiscal and external vulnerabilities remain very high, including debt sustainability and refinancing risks as well as crowding out of the private sector, and structural weaknesses constrain productivity, investments, and growth. The SBA recognized that resolving Pakistan’s structural challenges will require continued adjustment and creditor support beyond the program period. It is now critically important that the effort that started under this SBA continues. In this regard, the authorities’ interest in a successor arrangement is welcomed to anchor the policy adjustment in the coming years, restore Pakistan’s medium-term sustainability, and pave the way for strong and inclusive growth.

IMF report maintained that signs of Pakistan’s economic stability are strong and this year Pakistan’s economic growth is likely to be 2 percent while the growth rate will increase to 3.5 percent in the next financial year. The average inflation this year will be 24.8%, and next year it will come to 12.7% while unemployment at 8 percent this year and likely to fall to 7.5 percent. Fiscal deficit is 7.5 percent this year and likely to be 7.4 percent of GDP next year. This year, the current account deficit will be limited to minus 0.8 percent of GDP while the current account deficit will be negative 1.2 percent next year.

The end-FY24 debt-to-GDP ratio is projected to decrease markedly, driven by fiscal consolidation and ex-post negative real interest rates.

While the new government has indicated its intention to continue the SBA’s policies, political uncertainty remains significant. A resurgence in social tensions (reflecting the complex political scene and high cost of living) could weigh on policy and reform implementation.

The annual FBR revenue targets remain unchanged but there are risks of shortfalls in April and May 2024 due to holidays that will see port closures and weigh on revenue collection. Agreed contingency measures will be adopted should collections fall short. Additional efforts are also needed to meet the SBA’s revenue administration goals.

The authorities aim to complete, by June 2024, the bidding for PIA’s core business, of which the government would likely seek to sell a (controlling) 51 percent stake. To limit state balance sheet implications, the use of divestment proceeds would prioritize the settling of government guaranteed debt—to be transferred from PIA’s balance sheet to a holding company—held by commercial banks (PRs 242 billion, of a total of PRs 629 billion in liabilities to be transferred). Several smaller SOEs are also currently on an active privatization list.

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