IMF projections for FY2024-25

The IMF Staff Report on the Second and Final Review under the Stand-by Arrangement was released on the 10th of May 2024. It contains a set of detailed projections for the economy of Pakistan in 2024-25 and beyond.

The fundamental question is whether these projections build in the impact of a new Extended Fund Facility which Pakistan is currently negotiating with the IMF and likely to commence before the start of 2024-25.

However, in the balance of payments projection in the Staff Report, there is no provision for new funding by the IMF in 2024-25.

According to these projections, there will be a net outflow of funds from Pakistan to the IMF of debt repayment and interest of $1.5 billion. Therefore, the assumption can be made initially that the projections in the Staff Report for 2024-25 do not incorporate the impact of a new IMF Programme.

The extremely good news is that the IMF thinks, as indicated in the Staff Report, that Pakistan’s economy will not only survive but will perform relatively well in 2024-25 without IMF support. The bottom line is that there will be stability and continuity in external transactions and by the end of 2024-25, the foreign exchange reserves will rise to $13.6 billion, as compared to the likely level of $9 billion at the end of 2023-24.

Clearly, this is extremely unlikely given the fragile state of the economy and the fact that Pakistan is seeking a new Programme. In the absence of an IMF programme, the likelihood of the Government of Pakistan receiving almost $10 billion of external assistance in 2024-25 is very low.

There is no alternative but to presume that the IMF Staff projections do build in the likelihood of an IMF programme next year. Following the finalization of such a Programme there may be some further improvements in the projections, including the net inflow of funds from the IMF rather than an outflow.

Based, therefore, on the assumption that the IMF projections for 2024-25 include the likelihood of an ongoing programme, we can look at the projections. However, there is a need first to look at the IMF’s expectation of the outcome in 2023-24.

The current financial year is expected to close with a low GDP growth rate of 2%. According to the PBS (Pakistan Bureau of Statistics), the GDP growth rate was 2.5% in the first quarter of 2023-24 and only 1% in the second quarter.

There is a sharp contrast in the sectoral growth rates. Agriculture has performed exceptionally well, given the low base last year, but industry and services are showing near zero growth rates. As such, even a GDP growth rate of 2% may not be achieved in 2023-24.

The current account deficit is expected to be $3 billion by the end of the year. However, the physical control over imports has led to a virtual elimination of this deficit. Other projections are likely to be close to the actual outcome in 2023-24.

The IMF Staff Report has projected a significantly higher growth rate of 3.5% in 2024-25. This may also be difficult to achieve if the next Kharif crop is affected by the financial constraint faced by farmers due to the difficulty and lower price in the marketing of wheat. As such, a rise in the GDP growth rate from 2% to 3.5% will require a strong recovery in both the industrial and service sectors of the national economy.

The most problematic projection for 2024-25 relates to the rate of inflation. The IMF Staff Report expects it to decline sharply from the average monthly rate in 2023-24 of 24.8% to 12.7% in 2024-25. At the end of period, that is, in June 25, the rate of inflation is expected to be finally single digit at 9.5%.

The outcome of the rate of inflation in 2024-25 will depend upon a number of factors. First, there is the risk of more imported inflation. The underlying projection by the IMF is that by the end of 2024-25 the rupee will have depreciated to almost Rs 329 per US$. This will imply a significant devaluation of over 17% and could be the outcome of a move to a market-based exchange rate policy as insisted upon by the IMF.

Second, there is the likelihood of continuing big increases in electricity and gas tariffs in 2024-25 to limit the size of the circular debt. Third, given an ambitious tax revenue target, there may be increases in indirect tax rates and in the petroleum levy especially on motor spirit.

Further, inflationary expectations have become entrenched in the economy. Overall, it is more likely that there will be a more modest fall in the rate of inflation to between 16% and 18%, rather than to 12.7%.

The IMF staff projections of the budgetary position in 2024-25 do not represent currently a significant difference from the projected outcome in 2023-24. The revenue-to-GDP and the expenditure-to-GDP ratios are expected to be close to 12.5% and 20%, respectively, in both years. Consequently, the budget deficit will remain at close to 7.5% of the GDP and the primary surplus at 0.4% of the GDP.

However, there is the likelihood that the budget deficit may rise to above 8.5% of the GDP in 2023-24. This may be caused by a significant shortfall in both tax and non-tax revenues in relation to the targets for the current year.

Also, the Provincial Governments may not be able to generate the target cash surplus of Rs 650 billion. Therefore, if the projection by the IMF for 2024-25 remains the same despite a worse outcome in 2023-24, then this will imply that it expects a stronger fiscal effort next year.

Turning the current account of the balance of payments, the projection is that the year, 2023-24, will close with a growth rate of 11.9% in exports and 5% in exports. During the first ten months the respective growth rates have been 9.1% and negative 3.8%. Therefore, the IMF Staff projections expect a significant improvement in both growth rates in the last two months of 2023-24.

However, the projection is that exports will show a modest growth rate of 4.3% only in 2024-25. This is difficult to accept, given the expectation of a relatively large rupee devaluation which should increase the profitability of exports. Imports are expected to rise by 10%, given the artificially low base of 2023-24, due to the presence of physical controls of imports.

Overall, the IMF Staff Report expects 2024-25 to be a significantly better year for Pakistan. The GDP growth rate will be higher, the rate of inflation much lower, along with a budgetary primary surplus and low current account deficit. We will need to wait to see if the projections will be changed following the agreement on a new three-year IMF Extended Facility.

Copyright Business Recorder, 2024