Pakistan has been largely dependent on the U.S. and the IMF aid. However, the International Monetary Fund (IMF) has recently opined otherwise. The IMF has requested Pakistan to take necessary and required policy actions to counter the challenges to stability of the budget and the external sector. On the other hand, they remained a touch cautious about the government’s plan to surge customs duty for containing imports.
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Statement by the IMF’s Representative
While talking to a local newspaper, the Resident Representative in Pakistan at IMF, Tokhir Mirzoev has been reported to state:
“Despite a strengthening growth momentum, Pakistan’s imbalances on both external and fiscal fronts increased in the last fiscal year and require attention of the policymakers”
He further went on to advise:
“Despite a strengthening growth momentum, Pakistan’s imbalances on both external and fiscal fronts increased in the last fiscal year and require attention of the policymakers”
When asked about the need of another IMF programme, Tokhir answered:
“Pakistan still has sizeable external buffers which need to be preserved with the right policy mix aimed at correcting both external and fiscal imbalances. With sufficient policy effort, Pakistan can address these challenges without the IMF”
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Current account and budget deficits
In the last FY 2016-17, Pakistan registered record current account and budget deficits. Consequently, there have been rumors surrounding that the country might be needing another IMF programme.
In terms of the current account deficit in FY2017, Pakistan registered $12.1 billion against the official estimation of $4.5 billion. The gap of budget deficit also grew to 5.8% of GDP against the official target of 3.8%.
Keeping in mind the fiscal situation of the country, Tokhir commented:
“Significant effort will be needed to meet this fiscal year’s ambitious targets, especially with respect to revenue mobilisation. At the same time, policymakers have to find solutions to shortcomings of the fiscal federalism system. As highlighted during last Article IV consultations, it is unbalanced and prone to shocks”
The provinces of Pakistan spent extra Rs163.2 billion and it is one of the primary reasons of recording a budget deficit of 5.8%. In order to keep the overall budget deficit within limits, the federal government was looking forward to the provinces to generate a cash surplus of Rs339 billion.
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Economy of Pakistan faces significant challenges
While presenting the positive remarks about Pakistan, Tokhir stated:
“The challenges facing Pakistan’s economy are significant. Without a supportive policy mix, the current fiscal year could be difficult on both external as well as fiscal fronts. Not everything is going wrong in the economy. The economic growth has been strong and is picking up. The challenge is to make this growth more balanced, so that it involves more exports and does not overburden the balance of payments”
In addition, he said that the month of August proved to a good one for Pakistan’s economy.
“Stronger exports, remittances and foreign direct investment on the one hand and some moderation in import growth on the other have brought some relief to the balance of payments. Tax revenue outcome was also particularly encouraging. It is too early to tell whether the month of August was an exception or a sign of normalization. But policies need not wait to see what happens. A supportive policy framework to tackle both fiscal as well as external sectors is still needed. Early rebalancing of policies will help address potential challenges down the road in a timely manner”
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Moving forward
The federal government is looking forward to increase the customs duty on imported items to limit the mounting trade deficit. However, Tokhir was circumspect when he was asked to present IMF’s view about the same. He said:
“Using administrative measures to correct the external imbalances is rarely effective. Such measures tend to have a limited impact and often produce significant distortions in the economy. Most importantly, administrative measures do not make an economy more competitive in the long run”
On Tuesday, the State Bank of Pakistan (SBP) presented the balance of payments position. The sheet exhibited $2.6 billion in the current account deficit during July-August FY2017. The numbers are higher by $1.31 billion or 102% during the same period of the previous fiscal year.