IMF projections

The good news is that the IMF Executive Board has completed the First Review of the Stand-By Arrangement for Pakistan and authorized the immediate disbursement of $700 million. The press release from the IMF states that ‘economic activity has stabilized in Pakistan, although the outlook remains challenging and dependent on implementation of sound policies.’

The press release states that this implies strict adherence to fiscal targets, while protecting social spending, market-determined exchange rate policy and further reforms related to energy sector viability, SOE governance and climate resilience. In particular, the big increases in electricity and gas tariffs have been duly appreciated by the IMF.

The press release also contains the projections for 2023-24 of selected economic indicators. The objective of this article is to assess the likelihood of these projections.

The basic indicators are population and per capita income of Pakistan. The press release reports Pakistan’s population as 231.6 million in 2022-23. This differs from the population estimate by the Population and Housing Census of 2023 of 241.5 million. It is surprising that the IMF is not even aware of the population estimate from the latest Census in Pakistan.

The per capita GDP is reported by the press release as US$ 1456.6 in 2022-23. According to the recently released estimates of the GDP, with the base year of 2015-16 by the PBS, it is estimated at $1463.9 in 2022-23. Usually, the per capita income is derived from the Gross National Income, according to which it is $1553.

The really worrying estimate given in the press release is that of the incidence of poverty in 2019 at 21.9%, with the national poverty line. Surely, the IMF knows that poverty has increased sharply in Pakistan after COVID-19, the disastrous floods in 2022 and the over 2.5% decline in real per capita income in 2022-23.

The World Bank has estimated that the incidence of poverty has risen to 40% in Pakistan. Further, the IMF has indicated that the unemployment rate has risen from 6.5% to 8.0% currently. It is likely that it even approached 10% in 2022-23.

Projection of the GDP growth rate in 2023-24 by the IMF is 2.0%. The actual first quarter growth rate, as estimated by the PBS is 2.13%. The growth rate could be somewhat higher at close to 2.5% due to the low-base effect of the fall in agricultural and large-scale manufacturing outputs in 2022-23. The projection in the October 23 IMF publication, World Economic Outlook, of the GDP growth rate of Pakistan was 2.5% in 2023-24.

A key projection for 2023-24 by the IMF is of the rate of inflation at the monthly average for the year at 24%, with the end period rate at 18.5%. The first six months of 2023-24 have witnessed on average monthly inflation rate of 28.8%, which is even higher than the corresponding average for 2022-23 of 25.0%.

The IMF projection implies that the average rate of inflation from January to June 2024 will be significantly down to 19.2%. The rate of inflation in December was 29.7%. Therefore, such a big drop soon in the rate of inflation looks highly unlikely. A perhaps more realistic projection is that it will average close to 26% over the twelve months of 2023-24.

We turn now to the IMF projection of the budgetary outcome in 2023-24. Confidence has been placed by the IMF on realization of all the targets set at the time of the federal budget presentation. The revenue to GDP ratio is expected to rise from 11.4% to 12.5% of the GDP, while the level of expenditure is projected to increase from 19.2% to 20% of the GDP. Consequently, the budget deficit is projected at 7.6% of the GDP, marginally below last year’s level.

There are some risk factors associated with the budgetary projections. First, FBR revenues are linked almost 40% to the size of the import tax base. The 31.3% target growth in FBR tax revenues will be difficult to achieve in the presence of import controls by the SBP and the newfound stability in the exchange rate. During the first six months of 2023-24, the rupee value of imports has increased by only 8%.

Second, the provincial governments are expected to generate a large cash surplus of Rs 650 billion in 2023-24. The governments, especially of Punjab and Khyber-Pakhtunkhwa, are having serious problems in generating surpluses of over four times the level achieved last year.

Projections of monetary indicators are also optimistic in nature. The growth rate of broad money is expected to fall to 11%, compared to 14.2% in 2022-23. As of end-December 2023 the opposite is observed. The expansion in money supply has been 4.4% as compared to only 0.9% in the first six months of 2022-23.

The faster expansion in money supply is due to the big jump in net government domestic borrowing from scheduled banks to finance the budget deficit. This has been caused not only by the large size of the deficit but also because the net inflow of external financing has been small or even negative. There is a strong likelihood that the rate of monetary expansion could approach 18%, as compared to the 11% projection by the IMF. This will add significantly to inflationary pressures in 2023-24.

The most critical projections relate to the balance of payments and level of foreign exchange reserves. The IMF expects the current account deficit to be limited to 1.6% of the GDP and the level of foreign exchange reserves to rise to $9.1 billion by end-June 2024, as compared to $4.4 billion as of end-June 2023.

The original projection of the current account deficit by the IMF in July 2023 after the approval of the Stand-by Facility was1.8% of the GDP. It is expected now at a somewhat lower level because in the first five months of 2023-24 the deficit has been restricted to only 0.3% of the GDP.

This is attributable largely to the decline in imports of as much as 16% probably due to physical controls by the SBP. Otherwise, the deficit could have been much larger with only a modest increase in exports of 5% and a fall in remittances of over 10%.

The reserves position of the SBP has improved significantly from $6,094 million on the 15th of December 2023 to $8154 million as of the 5th of January 2024. They will further improve with the receipt of almost $700 million from the IMF after the successful review.

The question is what will happen to the balance of payments position in the second half of 2023-24? Will the SBP abandon the physical control of imports and move to a market-determined exchange rate policy, as asked for by the IMF? With the large rise in the real effective exchange rate that has taken place, the profitability of exports has been adversely affected, especially in the presence of a quantitative jump in energy costs.

The external financing requirement in the second half of 2023-24 is estimated at $10.5 billion. There has been no inflow from international private creditors in the first six months. Also, the level of foreign direct investment has been disappointing despite the efforts by the SIFC. Therefore, the target level of SBP reserves of $9.1 billion will be difficult to achieve. Pakistan will also have to successfully complete the second and third reviews of the IMF Stand-by Facility.

Overall, there is need to appreciate the efforts of the caretaker governments in getting a successful first review by the IMF of the Stand-by Facility. The IMF projections for 2023-24 are generally optimistic and demanding in nature. They will require special efforts at implementation of key structural reforms by the successor government soon after its assumption of power.

Copyright Business Recorder, 2024