IMF prognosis

According to a latest report by the IMF, picture of capital flows to Pakistan was largely blurred, with financial inflows remaining weak and debt payments on the rise. As such, sound macroeconomic policies will be crucial to ensure the sustainability of the balance of payments (BoP) over the medium to long-term period. On the internal side, the achievement of desirable low inflation would require more prudent monetary policy, accompanied by substantial fiscal adjustment to ease the government's funding requirements.
Important also will be a greater role of the State Bank and improved exchange rate flexibility to facilitate external adjustment and safeguard foreign reserves. About the outlook for inflation, it was likely to rebound later in 2012-13 to above 10 percent. More prudent monetary policy was required to reduce inflation. Overall, Pakistan continued to face difficult macroeconomic challenges as growth remained insufficient, underlying inflation was high, and the external position was weakening. This situation was further compounded by an uncertain global environment and a difficult domestic economic situation.
The IMF Executive Board Directors, as usual, have suggested a number of measures to address the situation. According to them, strong policy measures and deeper reforms were critical to address vulnerabilities, resume sustainable growth and reduce poverty. Directors called upon the government to make short-term revenue and expenditure efforts to achieve fiscal targets. Efforts for this should focus on broadening the tax base, and reducing subsidies while protecting the poor. In the long run, comprehensive revenue and expenditure reforms to strengthen fiscal position were required to create fiscal space for capital and poverty-related spending.
We feel that the IMF's statement, coming few days before the Pakistan team's visit to Washington, is a good indication of the way the talks between the two parties are likely to proceed. Reportedly, the Pakistan team would like to engage the Fund authorities for a probable IMF programme due to rapidly sliding foreign exchange reserves of the country which now stand between dollar 6 billion - dollar 7 billion. Foreign exchange reserves would fall to dangerously low levels due to the payment of dollar 840 million during the current year and another dollar 5.3 billion over the next two years or so to the Fund for its earlier SBA programme with the country. Added to this is the low financial inflows and high debt repayments. Also worrying is the reluctance of the US to release the amount of CSF in full. Some of the countries are even questioning the wisdom of financial assistance to Pakistan when its own richer sections are not paying their due taxes. Taking every aspect in view, it is good that Pakistan will be exploring the option of seeking another programme to help tide over a difficult situation but it would be not an easy sailing and the team should be prepared to listen to some advice which may not be that palatable.
Speaking objectively, most of the IMF observations not only make ample sense but need to be implemented without losing more time. The revenue generation is so weak, the budget deficit is so high and its source of financing so skewed that macroeconomic instability seems to be written on the wall. Similar is the position with external sector account despite strong remittance inflows. However, two of the suggestions are somewhat questionable. What better role is envisaged from the State Bank and monetary policy to bring macroeconomic stability? IMF probably wants a higher policy rate but such a stance is debatable, particularly due to so many other factors affecting the rate of investment in the country. IMF also wants improved exchange rate flexibility, probably meaning more depreciation of the rupee. Whether such a policy would improve the level of exports when productivity in the economy is so low and most of the exports are price inelastic is also a question to ponder more deeply. We believe that Shahid Ahmed Chaudhry and Waqar Masood are competent and experienced hands and would be able to plead the case of Pakistan quite convincingly against heavy odds.