ISLAMABAD: International Monetary Fund (IMF) has said that Pakistan’s macro-economic vulnerabilities are re-emerging.
In its country report on Pakistan released on Thursday, the IMF commended Pakistan for strengthening macroeconomic resilience during their 2013–2016 Fund-supported program.
It said that growth outlook remains favorable, but noted: “policy implementation weakened recently and macroeconomic vulnerabilities are reemerging.”
Against this backdrop, the IMF called on the Pakistani authorities to safeguard the macroeconomic gains of recent years through continued implementation of sound policies, and to continue with structural reforms to achieve higher and more inclusive growth.
Directors encouraged the authorities to strengthen fiscal consolidation. They noted that the FY 2017/2018 budget aims at further gradual consolidation, albeit at a slower pace than targeted under the Fiscal Responsibility and Debt Limitation (FRDL) Act, and will likely require additional revenue measures in light of recent revenue underperformance. Directors emphasized that sustained fiscal consolidation over the medium term, in line with the FRDL Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves.
To this end, it recommended mobilizing additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies, and increasing priority social spending.
The IMF also recommended strengthening the national fiscal federalism framework and public debt management.
It stressed the importance of maintaining a prudent monetary policy stance to preserve low inflation. The IMF noted that monetary policy has been appropriately accommodative, and urged the State Bank of Pakistan (SBP) to remain vigilant and be ready to tighten it in case inflationary pressures emerge or foreign exchange market pressures intensify.
It called on the Pakistani authorities to allow for greater exchange rate flexibility—rather than relying on administrative measures—to help reduce external imbalances and bolster external buffers. In this regard, it welcomed the authorities’ commitment to remove, within one year, the cash margin requirement for imports of consumer goods, which constitutes an exchange restriction and multiple currency practice. Directors welcomed ongoing progress in strengthening central bank autonomy, and called for implementing the remaining recommendations from the 2013 Safeguards Assessment and to phase out government borrowing from SBP.
The report saw many of the abovementioned measures as preconditions for moving to an inflation targeting regime in the medium term.
It underscored the importance of further advancing financial sector reforms to continue strengthening resilience and support financial deepening. However, it welcomed efforts to bring undercapitalized banks into regulatory compliance, further strengthen the regulatory and supervisory frameworks, address non-performing loans, and enhance the AML/CFT framework.
The report looked forward to the operationalization of the new deposit insurance. It stressed that further progress in the structural reform agenda is needed to make growth more inclusive and reduce poverty.
It welcomed the progress in fostering financial inclusion and implementing the business climate reform strategy, and encouraged the authorities to press ahead with these efforts. Directors also recommended further strengthening social safety nets.
The IMF called for maintaining a strong regulatory framework in the energy sector, swiftly addressing the renewed build-up of arrears in the sector, and ensuring its financial soundness.
The report noted that restructuring and attracting private sector participation in public enterprises as well as improving their governance will ensure their financial viability and economic efficiency while reducing fiscal risks.