IMF projections

The latest IMF projection of key macroeconomic variables of the economy of Pakistan are contained in the October 2020 issue of World Economic Outlook. The previous issue was for April 2020. Therefore, it is possible to see how the projections have changed in light of the longer exposure of the country to COVID-19.

The IMF projections are up to 2024-25. However, of greater importance are the projections for the on-going financial year and for the next year, 2021-22. Beyond this there is likely to be greater uncertainty about the prospects for the economy especially at this time. Also, since the World Economic Outlook has individual projections at the country level a comparison can be made with the prospects for major South Asian economies like India, Bangladesh, and Sri Lanka.

What is the economic outlook for growth in Pakistan's economy? The IMF has revised upwards the estimated growth rate in April of -1.5 percent in 2019-20 to -0.4 percent, in line with the estimate of PBS. As opposed to this, it now expects a lower GDP growth rate in 2020-21 of 1 percent only as compared to the April estimate of 2 percent.

The upward revision for 2019-20 may not be justified for two reasons. First, the expectation was that the large-scale manufacturing sector would close the year with a decline in real value added of 7.8 percent. The fall has been significantly larger at 10.2 percent. Second, the major crop outputs have been smaller. For example, the wheat crop has been almost 10 percent less than projected.

However, the downward revision of the projected GDP growth rate in 2020-21 from 2 percent to 1 percent is justifiable, first, due to the damage to crops from the locust attack and heavy monsoon rainfall. Second, there are indications that we will be seeing a second wave of COVID-19, which could lead to lockdowns and other restrictions. In fact, the World Bank has projected a growth rate of only 0.5 percent in 2020-21.

The IMF also expects the overall rate of investment in the economy to fall sharply from 15.4 percent of the GDP to 13.8 percent of the GDP and then recover somewhat to 14.5 percent of the GDP in 2021-22. This projection implies that the level of investment will actually fall in real terms during the current financial year by over 2 percent given the uncertain nature of the economic environment. This is highly likely and the fall in private investment could be even greater. Already, in the first quarter imports of machinery have fallen by as much as 17 percent.

The question is whether public development spending will be used as a way of providing a fiscal stimulus to the economy? During the first three months, the releases from the federal PSDP have shown a growth of 13 percent, but it is unlikely that this growth rate can be sustained in the absence of a corresponding growth in revenues. Meanwhile, the Provincial Governments are already facing liquidity constraints and this is likely to have limited their spending on projects.

A critical projection by the IMF relates to the anticipated rate of inflation in 2020-21 and 2021-22. Earlier, in April, this was expected to be 8 percent in the former year and 7.3 percent in the latter year. Now the projection has been revised upwards to 8.8 percent in 2020-21. The first three months of 2020-21 have witnessed an average increase in the CPI of 8.8 percent. Therefore, the IMF expects this average rate to persist over the year. But the end-of-period rate of inflation in June 2021 is projected by the IMF at 10.2 percent. As such, with the rate of inflation already at 9 percent in September and rising to 10.2 percent, the annual average could be close to 9.5 percent.

The fact that rate of inflation has been projected by the IMF as rising month-to-month is probably due to four factors. First, the year 2019-20 saw an exceptionally high rate of expansion in the money supply (M2) of 17.5 percent. This will have a lagged impact on the rate of inflation in 2020-21. Second, supply-shocks due to lockdowns in coming weeks could exacerbate inflationary pressures. Third, as the world economy gradually recovers, the oil price could rise from the extremely low level currently of $40 per barrel in the earlier part of 2021. Fourth, the projections are presumably based on the activation of the IMF programme sooner or later. This will imply increases in power and gas tariffs exerting thereby cost-push pressure on the price level.

The fact that the IMF projections are based on the return to an operational programme are confirmed by looking at the projections of public finances. A strong process of fiscal consolidation is anticipated by the IMF. The budget deficit is expected to be reduced from 8 percent of the GDP in 2019-20 to 6.7 percent of the GDP in 2020-21 and to 5.2 percent of the GDP in 2021-22. Consequently, the primary deficit will be converted to a primary surplus by 2021-22.

The process of fiscal stabilization is to be achieved by strong growth annually in total revenues of over 17 percent in 2020-21 and in 2021-22. FBR revenues are expected to rise by as much as 23 percent during the current fiscal year. The performance in the first four months has been way short of this target with a growth of 4 percent only. The required growth rate to achieve the target in the next eight months is almost 30 percent. This is well beyond the realm of possibilities. Also, the scope for higher fiscal effort is limited by the political siege of the incumbent government by the opposition and a GDP growth rate of only 1 percent or even less.

The target on the expenditure side is equally tough. Total expenditure is expected to be contained from 23.1 percent of the GDP in 2019-20 to 22.8 percent of the GDP in 2020-21 and to 22.2 percent of the GDP in 2021-22, which implies little scope for real growth in expenditure. This target reveals the absence of a 'human face' in the IMF programme. There is clearly a need for higher spending to provide relief to the larger number of poor households due to the negative impact of COVID-19 and for some fiscal space to provide a stimulus to the economy via tax incentives and larger development spending.

This brings us to the projections for other South Asian economies by the IMF. In the case of India, the fiscal deficit is projected to have risen substantially from 8.2 percent of the GDP in 2019 to 13.2 percent of the GDP in 2020 and remains high at almost 11 percent of the GDP in 2021. Similarly, the fiscal deficit is expected to remain high at close to 8 percent of the GDP in Sri Lanka. Pakistan, meanwhile, is restricted to bringing down the deficit to almost 5 percent of the GDP by 2021-22.

The Fund is likely to argue that Pakistan does not have the fiscal space to carry a larger deficit because this could spill over into a larger current account deficit, which will be difficult to finance given the relatively low level of foreign exchange reserves. Surely, this is the time when a Bretton Woods institution set up by the UN like the IMF must come to the aid of a country which has seen a big increase in unemployment and poverty and the economy has come to a standstill after COVID-19. The IMF ought to consider increasing the Rapid Financing facility to Pakistan beyond the $1.4 billion already received to provide a cushion at this unprecedented time.

In fact, the economy has been greatly stabilized on the external front by Pakistan in the first quarter of 2020-21. The current account in the balance of payments has actually gone into a surplus, thanks in particular to growth in remittances and containment of imports. Surely, there is more space for pursuing a somewhat more expansionary fiscal policy now and for providing some relief to the impoverished population due to the negative impact of COVID-19.

Apparently, the negotiations between the IMF and the Government have not been successful because of the former's insistence on very tough targets, especially on the fiscal front. We can only make an appeal to the IMF to consider the difficulties being faced by over 80 million poor people of Pakistan due to sharply rising prices and fewer jobs. As the negative effects of COVID-19 eventually go away, Pakistan must make a commitment to implementing an ambitious stabilization programme.

(The author is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2020