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IMF predicts 5% growth for Pakistan, electricity subsidy to 0.7% of GDP

IMF predicts 5% growth for Pakistan, electricity subsidy to 0.7% of GDP

WASHINGTON: five per cent growth for Pakistan has been predicted by the International Monetary Fund in the medium-term and easing of inflation to below 8 per cent in fiscal 2014-15.
In a detailed report on the country’s economic performance, the IMF warns that political and security conditions in the country continued to pose a serious challenge to the national economy.
The report predicts that in the medium-term, the growth is expected to rise to around 5pc, due mainly to easing fiscal adjustment and improvements in structural bottlenecks in the energy sector, public enterprises, and the investment climate.
Average inflation is expected to ease to below 8pc in fiscal year 2014-15 and fall further thereafter, as inflation expectations will be anchored by tight monetary policy and sustainable fiscal policy.
Foreign exchange reserves are expected to exceed $14 billion by end-June 2015 — a coverage ratio of over three months of imports.
The current account deficit is expected to widen to about 11/2 pc of GDP, driven by stagnant exports while non-oil imports pick up. The sharp decline in world oil prices should help contain import growth.
Reserves accumulation will be supported by the State Bank’s intervention in the foreign exchange spot market, privatisation proceeds, multilateral disbursements, and external private financing.
But the report also warns that slippages in policy implementation could impede investment and weaken growth prospects, undermining progress in macro-stabilisation. Political and security conditions remain challenging.
Recent political unrest, terrorist threats with attendant military operations in the border region with Afghanistan, sectarian violence, and urban criminal activity all pose significant risks.
Recent floods present additional downside risks to growth and fiscal performance.
The report notes that the country continues to face external vulnerabilities. Reserves levels and coverage ratios remain insufficient. Downside risks include weakened global economic conditions, which could impair exports and hurt remittances; and global financial volatility, which could make debt issuance more difficult and costly.
Sustained decline in oil prices also poses an upside risk, which may help ease balance of payments pressures and boost growth.
The IMF reminds the government that structural reforms are critical for achieving high and sustainable growth. It notes that the government’s reform agenda is moving forward, focusing in particular on energy sector reform, public enterprises, import tariffs, and the business climate.
The comprehensive energy sector reform is addressing long-standing issues of price distortions, costly subsidies, collection problems, supply and distribution deficiencies, and governance and regulatory weaknesses.
The IMF notes that the government is on track to reduce the electricity subsidy to 0.7 pc of GDP in fiscal 2014-15, through the surcharge implemented in October 2014 and tariffs adjustments planned for January and February 2015.
The Fund hopes that reduction in electricity subsidy, together with improved efficiency and collection, will also help reduce the circular debt arrears.
For the gas sector, construction of a liquefied natural gas terminal is nearly completed, which will improve supply and help reduce the cost of electricity generation. New gas prices will be announced by January 2015.
The government’s commitment to privatisation of public sector enterprises remains strong. The government is moving forward with the offering of a number of enterprises for privatisation, and plans to accelerate the pace of offerings/transactions in the coming year.
Trade reform is focusing on simplifying tariff rates, shifting most items to a lower rate, and eliminating trade statutory regulatory orders that establish special rates and/or non tariff barriers.