Macroeconomic conditions ‘have generally improved, but outlook remains challenging’, says IMF

The International Monetary Fund (IMF) has said that macroeconomic conditions in Pakistan have generally improved, with economic growth of 2% expected in FY24.

However, the outlook remains challenging and dependent on the implementation of sound policies, it added in a statement that was part of the Executive Board announcement of the completion of the first review of Pakistan’s Stand-By Arrangement (SBA).

“Macroeconomic conditions have generally improved, with growth of 2% expected in FY24 as the nascent recovery expands in the second half of the year. The fiscal position also strengthened in FY24Q1 achieving a primary surplus of 0.4% of GDP driven by overall strong revenues,” the Washington-based lender said.

However, the IMF noted that inflation remains elevated in the South Asian country.

“Although with appropriately tight policy, this could decline to 18.5% by end-June 2024,” it said.

IMF said Pakistan’s gross reserves increased to $8.2 billion in December 2023, up from $4.5 billion in June, while the exchange rate has been broadly stable.

“The current account deficit is expected to rise to around 1.5% of GDP in FY24 as the recovery takes hold.

“Assuming sustained sound macroeconomic policy and structural reform implementation, inflation should return to the SBP (State Bank of Pakistan) target and growth to continue to strengthen over the medium term,” it said.

Going forward, broad-based reforms to improve the fiscal framework—mobilizing additional revenues particularly from non-filers and under-taxed sectors and improving public financial management—are required to create fiscal space for further social and development spending: Antoinette Sayeh, Deputy Managing Director and Chair

The remarks come as the Executive Board of the IMF completed the first review of Pakistan’s economic reform programme supported by the IMF’s SBA. The Board’s decision allows for an immediate disbursement of SDR 528 million (around $700 million), bringing total disbursements under the arrangement to SDR 1.422 billion (about $1.9 billion).

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Pakistan’s 9-month SBA was approved by the Executive Board on July 12, 2023, in the amount of SDR 2.250 billion (about $3 billion at the time of approval).

The IMF said the programme aims to provide Pakistan with a policy anchor for addressing domestic and external balances and a framework for financial support from multilateral and bilateral partners.

“The program is focused on (1) implementation of the FY24 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while protecting critical social spending; (2) a return to a market-determined exchange rate and proper FX market functioning to absorb external shocks and eliminate FX shortages; (3) an appropriately tight monetary policy aimed at disinflation; and (4) further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience,” it said.

Following the Executive Board discussion, Antoinette Sayeh, Deputy Managing Director and Chair, was quoted as saying that Pakistan’s programme performance under the Stand-By Arrangement has supported significant progress in stabilising the economy following significant shocks in FY2022-23.

“There are now tentative signs of activity picking-up and external pressures easing,” he said. “Continued strong ownership remains critical to ensure the current momentum continues and stabilisation of Pakistan’s economy becomes entrenched.

“The authorities’ strong revenue performance in FY24Q1 as well as federal spending restraint have helped to achieve a primary surplus in line with quarterly program targets.

“However, in the context of pressures, including from provincial spending, efforts at mobilising revenues and ongoing non-priority spending discipline need to continue to ensure that the budgeted primary surplus and debt goals remain achievable.

“Going forward, broad-based reforms to improve the fiscal framework—mobilising additional revenues particularly from non-filers and under-taxed sectors and improving public financial management—are required to create fiscal space for further social and development spending.

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“The authorities took challenging steps to bring both electricity and natural gas prices closer to costs in 2023. Continuing with regularly-scheduled adjustments and pushing cost-side power sector reforms are vital to improving the sector’s viability and protecting fiscal sustainability.

“Inflation remains high, affecting particularly the more vulnerable, and it is appropriate that the SBP maintains a tight stance to ensure that inflation returns to more moderate levels.

“Pakistan also needs a market-determined exchange rate to buffer external shocks, continue rebuilding foreign reserves, and support competitiveness and growth. In parallel, further action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is necessary to support financial stability.

“Boosting jobs and inclusive growth in Pakistan requires continuing protection of the vulnerable through BISP and accelerating structural reforms, most notably around improving the business environment and leveling the playing field for investors, advancing the SOE reform agenda and safeguards related to the Sovereign Wealth Fund; strengthening governance and anti-corruption institutions; and building climate resilience.”

The current IMF programme is scheduled to end in the second week of April.

The development holds significance for Pakistan’s economic landscape as the country faces a low level of foreign exchange reserves amid repayments and low non-debt creating dollar inflows.

Currently, foreign exchange reserves held by the State Bank of Pakistan stand at $8.15 billion as of January 5.