IMF programme: projections, targets

The IMF Staff Review Report on the sixth review of the on-going IMF program was released on the 4th of February following its successful completion and the approval of $1 billion loan, transfer to Pakistan by the IMF Executive Board.

The report is a very comprehensive document. It identifies the structural problems that Pakistan faces and the nature of reforms required to remove these problems. It contains a projected Medium-term Macroeconomic Framework up to 2025-26. In addition, it has detailed projections for the same period of the balance of payments, gross external financing requirements and potential sources and the general government budget.

The targets are in the form of quarterly performance criteria and indicative targets. This report contains these targets for the quarterly seventh, eighth and ninth reviews. These reviews are expected in March, June and September 2022. The program ends in September 2023. Successful completion of a review will provide access to a loan installment of approximately $1 billion.

The objective of this article is to examine the projections for 2021-22. These projections were probably based on data available on the economy in early December after the completion of negotiations with the IMF by the Government team led by the Finance Minister, initially in Washington and then in Islamabad. This process was perhaps the longest and toughest ever in the history of IMF programs with Pakistan.

There is need to get a sense of the perception of global economic trends by the IMF and how they impact especially the balance of payments of Pakistan. Over the year 2021-22, the IMF indicates that export prices of Pakistan are likely to increase in US$ terms by 13.4 percent and import prices by 15.4 percent.

The actual increases have been substantially larger in the first six months of 2021-22. The IMF’s own Commodity Price Index indicates a bigger increase. Therefore, the IMF has based its annual projection on the expectation of a major decline in international commodity prices in the second half of 2021-22. Clearly, the projections for Pakistan will hinge on whether this happens or not. In particular, the inflation rate and the trade deficit projections will depend on whether the IMF’s expectation is realized or not.

Turning to the projections of key macroeconomic variables for 2021-22 in the Staff Review Report, they appear to be very optimistic in nature. First, the GDP growth rate is projected at 4 percent in 2021-22. At the time when this projection was made there was the good news of the 30 percent jump in cotton output and 5 percent growth in the large-scale manufacturing sector.

Since then, there has been substantial gas loadshedding and shortage with high prices of fertilizer impacting adversely on the forthcoming Rabi crops. It is not surprising that in a recent projection the World Bank has revised the GDP growth rate of Pakistan in 2021-22 down to 3.4 percent.

One of the most questionable projections in the Report relates to the inflation rate projection for 2021-22. Clearly, this is based on the above-mentioned optimism about the downward trend in global commodity prices. As such, it is expected that the monthly rate of inflation in the CPI will be 9.4 percent in 2021-22.

It was 9.8 percent in the first six months of the year. This implies that the projection is for the rate of inflation between January and June 2022 to average 9 percent monthly. Already, the actual inflation rate in January was much higher at 13.2 percent.

The motivation behind the low projection of the inflation rate is not only because of falling prices but also due to the perhaps completely unexpected projection that the rupee exchange rate will remain stable in nominal terms from the end of December 2021 onwards up to the end of June 2022. The monthly average of the exchange rate from July to December 2021 was Rs 168.93 per US dollar. The Report has projected that the monthly average for the full year, 2021-22, will be lower at Rs 167.33 per dollar.

What has motivated this optimism when on the day of release of the report the exchange rate was Rs 174.40 per dollar? The IMF will have to provide a justification for this extremely unbelievable projection. Otherwise, it will have to revise most of the macroeconomic projections for 2021-22 due to the need to raise the size of the GDP upwards considering the higher likely average rate of inflation during the year.

This problem is further compounded by the extreme optimism on the size of the trade deficit in the second half of 2021-22. The six-monthly estimated growth rates in the Report of exports, imports and the trade deficit are presented in Table 1. The IMF is anticipating

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                                       Table 1
                       Six Monthly Growth Rates of Exports,
                  Imports and the Balance of Trade in 2021-22 (%)
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                            1st Six Months        2nd Six Months    2021-22
                            July - December       January to June
                            (Actual)              (Projected by IMF)
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Exports                     29.0                        7.4            17.4
Imports                     56.9                       -0.9            24.1
Deficit in the Balance 
of Trade                    86.0                       -7.7            30.1
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Source: IMF Program Sixth Review Staff Report
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stabilization of the economy in the second half of 2021-22 with a reduction in the trade deficit.

These projections must have been vetted by the SBP and the Ministry of Finance. Clearly, they also believe in the likelihood of commodity prices crashing and leading to a fall in imports and in the deficit in the balance of trade, thereby ensuring nominal stability in the rupee exchange rate.

There is absolutely no doubt that an alternative scenario needs to be built up with more realistic assumption about the movement in commodity prices, especially with the price of crude oil lingering at over $90 per barrel. The present Sixth Review report cannot be taken as a serious professional document. Accordingly, some of the Performance Criteria and Indicative Targets for the next three reviews will need to be changed substantially.

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

Copyright Business Recorder, 2022