Covid-19 challenge: Government steps must be targeted, temporary: IMF

The regulatory measures and expanded refinancing schemes of the government to contain the ensuing economic impact of COVID-19 must be targeted and temporary, and their design should not create moral hazard nor foster poor credit risk management practices, says the International Monetary Fund (IMF).

IMF in its latest report "Request for purchase under the Rapid Financing Instrument", emphasized on adoption of the necessary supervisory procedures to ensure that measures proposed will not obscure credit quality assessment in the future.

With growth remaining below potential, risks associated with policy slippages and resistance to reforms, including from vested interest groups, loom large, the report maintains.

Downside risks to the outlook are high given the unusual uncertainty about the duration and magnitude of the outbreak and the persistence of measures to contain it.

The IMF has emphasized that government support measures must be targeted and temporary, focusing on the immediate health spending needs and protection of the most vulnerable, while preserving long term sustainability.

The baseline assumes a gradual lifting of containment measures and normalization of economic activity both domestically and internationally in fiscal year 2021, but a deeper slowdown cannot be ruled out if these assumptions do not materialize.

With growth remaining below potential, risks associated with policy slippages and resistance to reforms, including from vested interest groups, loom large. This, together with weak implementation capacity, may jeopardize program objectives and the availability of external financing.

The authorities' commitment to the current Extended Fund Facility (EFF) programme mitigates some of the downside risks, and their decisive policy and reform implementation would support a faster recovery in the coming years.

Pakistan's public debt is projected to increase to around 90 percent of GDP in fiscal year 2020 against 85 percent prior to the Covid-19 shock due to the sharp decline in growth and the increase in the budget deficit, the report states.