IMF's assessment of the economy

The IMF Staff Report released after completion of the eighth review of Pakistan's three-year Poverty Reduction and Growth Facility (PRGF), gives high marks to the country's economic performance but also points out, without mincing words, the vulnerabilities of the economy.
It notes that since December, 2001, "Pakistan's economic growth has rebounded, inflation has remained low, debt indicators have improved considerably and foreign exchange reserves have increased sharply."
The targeted growth rate for 2004-05 was "ambitious but achievable" provided external demand and weather conditions remained favourable and structural reforms continued. But maintaining growth rates of 6 percent and higher over the medium term would require a substantial increase in private and public investment, accompanied by significant improvements in productivity.
So far, however, macro-economic performance has been very strong and the implementation of the PRGF programme remains broadly on track. Price pressures have 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.
Nevertheless, the Fund was assured that State Bank stood ready to tighten monetary policy more aggressively, should there be any sign of significant inflationary pressures.
The Report, however, notes with concern that the perception of fragile security conditions continues to affect investment. Although the constitutional dispute has been resolved after the approval of LFO by the Parliament and recent improvement in relations with India is expected bolster regional stability, yet tension remains high along the Afghan border while terrorist acts occur occasionally.
According to the IMF, it is also difficult to say if there has been reduction in poverty during the programme period. A household survey conducted in 2000-01 by the government, though, said that just one-third of the population lived in poverty, and the Fund has speculated that the situation might have improved now as these figures did not take into account the strong economic growth of the last two years. But the debt indicators are still relatively high and reducing these further to a sustainable level will require continued fiscal adjustment and strong economic growth.
The build-up of exchange reserves was expected to remain slow as current account surplus was projected to diminish further in 2004-05.
The Staff Report, in our view, gives a very objective account of the prospects of the economy. Although it has commended the recent performance of the economy, it has totally demolished the myth that the country has now reached a stage from where higher growth trajectory would be something automatic and could be sustained without major efforts.
Higher growth rate in future, touted so often by our economic managers, could only be achieved if momentum of reforms is maintained, investment is massively increased together with significant improvement in productivity, and taxation of investment goods is reduced.
Obviously, this is a tough agenda in the circumstances now prevailing in the country. Pressures are already mounting on the government for loosening the fiscal stance to raise social spending.
There are also demands to further raise government wages and pensions, increase subsidies, reduce taxes and lower energy prices. Parliamentarians are asking for more development funds for their constituencies.
In the past few years, it was relatively easier to resist such pressures under a military dispensation because of sound economic management, supervised largely by the IMF. Help from friendly countries and multilateral institutions was also a positive factor.
The political government would now face a testing time in ensuring continuity in policies and, at the same time, meeting the expectations of the people. Only time could tell whether the government would be able to balance the competing objectives in the years to come.
The IMF has also linked debt indicators, which are presently relatively high, to continued fiscal adjustment and strong economic growth. Such a cautionary approach by the Fund, we feel, is timely because of unbounded optimism of the government about achievements and prospects in all areas of the economy.
Another noticeable aspect of the economic picture highlighted by the IMF staff is the level of poverty. It appears from the Report that it does not agree with government's claim about the reduction in poverty by 4.2 percent during the last two years but believes that it may have decreased somewhat due to strong growth. Other institutions like SPDC are coming up with different figures altogether. All of this lowers the credibility of the government statistics.
In our view, the poverty level may have declined somewhat as suggested by the IMF but in order to assess the impact of its own policies and redirect its efforts, if called for, the government must make immediate arrangements to conduct a comprehensive survey to estimate the exact level of poverty and update it periodically under an independent agency.
Overall, our economic managers need to give a serious thought to the IMF Staff Report because of its objectivity and the help it could render in designing future policies.