IMF mission's statement

The statement issued by the visiting IMF mission at the conclusion of the Article IV consultation with Pakistan on 20th September, 2007, is based on an objective assessment of the economy. Pakistan's economy, it noted, continued to perform well in 2006-07, with real GDP growth increasing to seven percent.
Average inflation remained at nearly eight percent, but the 12-month rate has declined to 6.5 percent in recent months. "This outcome has been made possible by continued prudent macroeconomic management and structural reforms that have encouraged a strong pick-up in domestic and foreign investment".
The prospects for sustained high growth over the medium term remain favourable, "as macroeconomic stability and market-oriented reforms further take hold". The mission also welcomed the measures announced in the recent Monetary Policy Statement of the State Bank of Pakistan, including its intention to reduce the role of the central bank in financing the budget deficit and providing export finance.
While appreciating positive trends in the above areas, the IMF mission did not feel shy of highlighting the emerging weaknesses and vulnerabilities of the economy. The need for an appropriate mix of monetary and fiscal policies for bringing down the external current deficit was underlined.
The mission reaffirmed the objective of reducing the budget deficit to four percent of GDP in 2007-08, which would be consistent with the requirements of the Fiscal Responsibility Law, and supported the government's intention to contain current expenditures to make room for higher development outlays. It was particularly stressed that further fiscal consolidation, starting in 2007-08, would contribute significantly to reducing the current account deficit while lessening pressures on real interest rates.
The mission also recommended a flexible approach to the determination of interest rates to help achieve the inflation objective and reduce import growth. The Pakistan authorities agreed "that a substantial revenue mobilisation effort was necessary over the medium term to reduce the fiscal deficit while allowing for additional spending on infrastructure and poverty alleviation".
The assessment as well as conclusions of the IMF mission, in our view, reflect a true picture of the current situation of the economy. Inflation, budget outcome and current account of the country are three vulnerable areas highlighted by the mission. Appropriate suggestions to overcome the difficulties in each area have also been given. Inflation rate could be reduced further by adopting a flexible approach to interest rates which would simply mean an upward adjustment in interest rates if inflationary trends persist or gather momentum.
A substantial revenue mobilisation effort and containment of current account expenditures was recommended for fiscal consolidation and securing higher outlays for development expenditures. Tight monetary and fiscal policies would obviously help reduce import growth and lower current account deficit. However, it is important to note that this is a kind of textbook approach to the economic problems and the IMF has said nothing extraordinary.
It needs to be recognised that these are the standard prescriptions, discovered after decades of investigation and research which usually cure the ailment. The agreement of Pakistani authorities to the solution of the issues identified by the Fund staff suggests that they also don't see any other alternative to overcome the emerging weaknesses of the economy.
However, the moot question is whether the government would be able to make some progress on the recommendations of the IMF mission, particularly in an election year. For instance, we know the hue and cry raised by the private sector and by some sections of the government when the State Bank tightened the monetary policy recently and indicated its firm resolve to take further measures in the Monetary Policy Statement if inflationary tendencies did not subside.
Also, it is very nice of the IMF to say and for the authorities of the country to agree that a substantial revenue mobilisation effort is crucial at this stage. But it needs to be remembered that the options available to implement the required policies usually involve harsh decisions which the government will try to avoid at all costs at the present juncture for political imperatives and other known reasons.
Obviously, such decisions can only be made when the government is stable and steadfast, which does not seem to be the position at the moment. Some analysts could argue that the proposals of the IMF are not binding on the country because we are not having any programme with the Fund at the moment and are not likely to negotiate one in the near future due to comfortable level of foreign exchange reserves, but it needs to be remembered that it would be easier to overcome the weaknesses of the economy at this stage rather than waiting and letting them assume serious proportions, obliging the country to take much stricter actions at a later stage.