IMF projections

The latest set of projections by the IMF at the country, regional and global levels are contained in the publication, World Economic Outlook, released recently from Washington. This is a very useful publication and helps in identifying trends, both short- and medium-run, in key economic indicators. Projections are given from 2021 to 2026.

Focusing first on projections for the world economy, the IMF is optimistic about the medium-run prospects. The global GDP had contracted in real terms by over 3 percent in 2020 after Covid-19 pandemic. The year 2021 is expected to close with a strong recovery and a rise in the GDP of almost 6 percent. In 2022 the growth rate is projected at 4.9 percent and in 2023 at 3.6 percent.

The global rate of inflation was down to 3.1 percent in 2020, reflecting a downturn in commodity prices after COVID-19. It is expected to rise somewhat to 4.3 percent in 2021 and come down to 3.8 percent in 2023. This is perhaps not fully reflective of the likely trend in commodity prices, which show much larger increases. The overall commodity price index plummeted by 10 percent in 2020. It is now expected to show a big jump of 46 percent in 2021 and remain largely unchanged in 2022.

The world trade in goods is estimated to have shown a decline in volume of 5 percent in 2020, with an anticipated big increase of 11 percent in 2021 and 6.6 percent in 2022. This holds out a good prospect for a bigger rise in volume of exports by Pakistan in 2021-22 of up to 6 percent.

The rise in prices of major commodities has a key role in determining the extent of 'imported' inflation in the country. The IMF expects the average price of crude oil to be at close to $66 per barrel during 2021 and remain unchanged in 2022. This is somewhat reassuring.

Cotton price in the global market is projected to increase by 34 percent in 2021 and continue rising by over 2 percent in 2022. Palm oil price could jump by as much as 52 percent in 2021 but come down somewhat by 10 percent in 2022. The wheat price is expected to continue rising by 38 percent in 2021 and by 9 percent in 2022. Overall, prices are likely to be high of commodity imports by Pakistan in 2021-22.

Turning to the outlook for Pakistan, the IMF projections of growth and the rate of inflation are moderate in character. The GDP is expected to rise by 4 percent in 2021-22 and by 4.5 percent in 2022-23. The initial recovery in 2020-21 is likely to be sustained, although the projected growth rate in 2021-22 is somewhat less than the target growth rate of 4.8 percent of the government.

The big surprise is the anticipated relatively low rate of inflation in 2021-22 of 8.5 percent. Already, in the first three months, the average increase has been 8.6 percent. Therefore, the IMF's expectation is that the rate of inflation will remain largely unchanged during the next nine months. Further, the rate of increase in the CPI is projected to come down to 7.6 percent in 2022-23.

According to the IMF, the outlook for investment is also positive. There will continue to be a process of recovery in 2021-22 with the overall rate of investment rising to 16.4 percent of the GDP from 15.2 percent of the GDP in 2020-21.

The most critical projections by the IMF for Pakistan are those relating to the volume of trade and the size of the current account deficit in the balance of payments. These projections will probably feature in the next Staff Review report, if the on-going sixth review is successfully completed, and the programme continues.

The cutting edge of the stabilization programme of the IMF for Pakistan is that it expects the volume of imports to be compressed by as much as 10.5 percent in 2021-22. This implies that the quantum of imports will be even lower than that attained as far back as 2018-19.

This extraordinary contraction in imports during the on-going financial year is considered as essential because IMF has projected that the current account deficit will have to be limited to 3.1 percent of GDP, equivalent to approximately $9 billion. This will require the average monthly deficit to be $750 million in 2021-22. Already, in the first two months, it has averaged $1180 million. As such, the monthly deficit in the remaining ten months will have to be brought down to $782 million, implying a compression of 34 percent in relation to the level of the monthly deficit in the first two months.

This is likely to be possible only if there continues to be a big depreciation in the value of the rupee, a hike in interest rates and measures to regulate imports. As such the basic question is whether a big process of adjustment by Pakistan is considered necessary by the IMF to stabilize the balance of payments position of the country.

The BNU Macroeconomic Model has been used to determine the extent to which policy instruments will be required to compress the volume of imports by as much as 10.5 percent in 2021-22. A rise in the policy rate of up to 2.5 percentage points and a devaluation of the rupee of over 15 percent could be required.

This raises serious doubts about the other projections by the IMF. With a significantly higher interest rate regime and a jump in the rupee cost of imported machinery, private investment is unlikely to increase in 2021-22 in real terms. Domestic production will also be negatively impacted by the significantly higher prices and decline in availability of imported raw materials and intermediate goods. Consequently, it is highly unlikely that a GDP growth rate of 4 percent can be attained in these circumstances.

Further, the projection of the rate of inflation at 8.5 percent also looks optimistic. With the combination of significantly higher dollar prices of key imports, big devaluation of the rupee and hike in energy tariffs, the probability is higher that inflation will rise to a double-digit rate in 2021-22.

Overall, the IMF's projections for Pakistan appear to be optimistic. If the Program continues then Pakistan must insist on the consistency between the intensity of use of the various policy instruments and these projections on Pakistan by the IMF in the latest World Economic Outlook.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021