The ninth mandatory International Monetary Fund staff review and 2015 Article IV consultations notes that while the deficit is relatively small its structure - a large trade gap (7.5 percent of GDP) financed by remittances (7 percent of GDP in FY 2015) and other transfers - highlights the importance of strengthening Pakistan's export competitiveness.
The IMF's Staff Mission in its ninth review observed that external vulnerabilities include a protracted period of slower growth in key advanced and emerging market economies (including in China and the GCC countries), hurting exports and remittances, adding that the continued appreciation of the dollar combined with limited variation in the rupee exchange can further erode its export competiveness. "Exports, and consequently growth, will be adversely affected further if Pakistan falls behind its competitors in securing favourable treatment in major markets," says the IMF.
The review noted that Pakistan's exports are highly concentrated, with textile and clothing accounting for about a half of total exports of goods. Moreover, Pakistan's world market shares, both for these products and across the full spectrum of exported goods, have been either stagnant or declining in recent years. In IMF's view this is reflective of both structural impediments to business productivity and security issues. Moreover, the marked appreciation of the real effective exchange rate over the last two years points to the need for continued structural reforms and supportive monetary, fiscal, and financial sector policies to maintain a competitive real effective exchange rate, supporting exports and import-competing industries.
Pakistani authorities apprised the Fund that they are implementing a strategy to take full advantage of trade preferences available from the European Union who have extended the Generalised System of Preferences plus benefits from January 1, 2014 on a broad range of Pakistan's exports. The government also remains committed to promoting trade with regional countries, especially under various regional trade arrangements.
The review highlights Pakistan's current ranking at 138 out of 189 economies in the World Bank's Doing Business Report 2016 and 126 out of 140 countries in the World Economic Forum's Global Competitiveness Report 2015-16 - the latter indicating that Pakistan ranks below the Middle East, North Africa, Afghanistan, and Pakistan comparator group in every sub category but market size and its score gradually deteriorated over the past 10 years. Global Competitiveness Index score is significantly co-related with economic growth through its positive impact on productivity with the Fund staff suggesting regulatory reforms, FDI technology transfer index and increase in the share of trade and public investment to GDP by 1 percent point each to raise Pakistan's medium-term growth potential to 6.5 percent in 2017-18.
The IMF review notes that the Pakistani authorities agreed with the importance of raising business productivity and investment to stimulate exports and growth, while also pointing to security-related constraints during the past decade which have affected outcomes. The IMF pointed to plans to work with the World Bank to develop a new reform agenda with specific time-bound measures to strengthen the business climate (new end-February 2016). Pakistan highlighted the existing agenda to promote financial inclusion, develop alternative dispute resolution mechanisms, simplify property registration, and develop the regulatory framework for credit bureaus. The authorities were sceptical that public borrowing might crowd out private sector credit amid adequate liquidity in the banking sector and low nominal loan demand for working capital amid falling commodity prices. Pointing to the inherent imprecision of estimates of exchange rate alignment, Pakistani authorities held the view that the nominal exchange rate, being market determined, is in line with fundamentals.
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