IMF sees 6 percent GDP growth achievable

The International Monetary Fund (IMF) has said that the government estimates of at least 6 percent GDP growth for 2004-05 are ambitious but achievable assuming structural reforms should continue.
The IMF released Pakistan's Staff Report after completion of eighth review of the three-year Poverty Reduction and Growth Facility (PRGF) programme.
The growth rate is reachable provided that external demand and local weather conditions remain favourable.
But maintaining growth rates of 6 percent and higher over the medium-term will require a substantial increase in private and public investment, accompanied by significant improvements in productivity.
Moreover, the Fund said that public investment needs to be raised massively and taxation of investment goods should be reduced.
The Fund report also suggests that the gains from the improved macroeconomic performance should be fairly distributed among the population.
The authorities believe that with the economy now growing at a faster pace, the rate of inflation in 2004-05 is likely to be marginally higher.
Consequently, while annual average inflation is expected to be close to or slightly above, 4 percent in 2003-04, inflation is targeted not to exceed 5 percent in 2004-05.
The SBP envisages some further modest tightening in the months ahead to slow monetary expansion and contain price pressures. But on balance, the authorities believe that the risks of a marked increase in inflation are low, with weak import prices except for petroleum products and a strong Pakistani rupee.
However, the SBP assured the mission that it stands ready to tighten monetary policy more aggressively, should there be any sign of significant inflationary pressures.
The mission noted that rapid monetary expansion and substantial recent increases in sensitive prices argued for an early tightening of monetary policy.
To help lift a significant share of the population out of poverty, the authorities are targeting economic growth rates of at least 6 percent annually over the medium term.
This is ambitious, but achievable, assuming structural reforms continue; in the 25 years before the liquidity crisis of the late 1990s, economic growth had been on an average of 5 percent annually.
For 2004-05, a growth rate of 6 percent could very well be realised, building on the current momentum, provided that external demand and local weather conditions remain favourable. But maintaining growth rates of 6 percent and higher over the medium-term will require a substantial increase in private and public investment, accompanied by significant improvements in productivity.
Within the overall framework provided in the Poverty Reduction and Strategy Paper (PRSP), endorsed by the Executive Board in March 2004, the eighth review discussions focused on the 2004-05 macroeconomic framework and on maintaining the momentum of structural reforms in the fields of taxation, expenditure management, financial intermediation and the energy sector.
Following several years of consolidation, pressures are mounting for the government to adopt a looser fiscal stance to support growth.
Critics of the government argue that public investment needs to be raised massively and taxation of investment goods reduced to help in achieving economic growth rates in excess of 6 percent, even if this might imply a higher fiscal deficit.
These pressures are reinforced by demands that the gains from the improved macroeconomic performance be distributed fairly among the population.
Consequently, there are demands to raise government wages, reduce taxes and lower energy prices. The Pakistani authorities are trying to balance these pressures with the need to raise social spending and continue to reduce Pakistan's still substantial public debt burden.
All but one of the non-observed structural performance criteria is related to the power sector and all reflected the timing of actions.
While the government did prepare an action plan for establishing a transparent regulatory framework for setting electricity tariffs in October 2003, the plan stated that the framework for regional tariff setting would be determined by February 2004, rather than by end-December 2003 as envisaged under the programme.
It was announced only in June 2004 (first waiver). This delay also had some impact on recent tariff adjustments. A downward tariff adjustment for KESC, determined by the National Electric Power Regulatory Authority (Nepra) in mid-January 2004, was implemented only in mid-April, well after KESC's second quarter FIP results were known (second waiver).
Earlier, the government had implemented a downward tariff adjustment for Wapda in November 2003, although Wapda had missed the accrual balance target for the first quarter by a very small margin (third waiver).
The government delayed the implementation, however, until it was confident that Wapda would meet its (cumulative) second quarter target, which, as noted, it did.
Outside the energy sector, the full transfer of ownership and management of HBL was completed by end-February 2004, two months later than envisaged under the programme (fourth waiver).
The IMF said that macroeconomic performance continues to be very strong and implementation of the PRGF programme remains broadly on track. Economic growth is expected to exceed the target and reach 6.4 percent in 2003-04 (July-June).
Growth is broad-based, but most pronounced in the export-oriented large-scale manufacturing. Price pressures increased modestly, reflecting strong domestic and external demand, high capacity utilisation in some sectors, rising petroleum prices, and pressures emanating from the partial liberalisation of the wheat market. Consequently, twelve-month inflation rose to 6 percent in April 2004.
Equity and, reportedly, real estate prices have risen sharply. All quantitative performance criteria for end-December 2003 were met.
Similarly, most indicative targets for end-September and end-December 2003 were met, and preliminary data suggest that most indicative targets for end-March 2004 have been met as well.