The International Monetary Fund believes that significant further economic progress in Pakistan is within reach. Real GDP is expected to grow by more than 4% during this and next fiscal year.
The fiscal deficit will further decline to 4.3% of GDP in 2015-16. Macroeconomic stabilization in the country is well under way and the threat of a crisis has significantly receded, AAP reported.
The IMF report notes that Pakistan plans to undertake adequate further fiscal consolidation while structural reform efforts are continuing.
The report on the seventh review under the extended arrangement and modification of performance criteria, however, also points out possible potholes that can derail the progress. “Much remains to be done to achieve a sustainable economic transformation,” it warns.
Lagging Behind
According to the report, Pakistan still lags behind other emerging market countries in key macroeconomic and business climate indicators.
Economic growth remains below the 5-7% annual rate needed to absorb new entrants into the labor market and achieve improvements in living standards for wide segments of society. Public debt is still high and the tax-to-GDP ratio remains among the lowest in the world.
Significant reforms are needed to boost private investment, broaden the tax base, improve tax administration, ease growth bottlenecks, and enhance the economy’s productivity and competitiveness.
Private investment, including FDI and exports are still much below desired outcomes.
Electricity outages continue to be an important restraining factor for competitiveness and growth.
In addition, the appreciation of the rupee in real effective terms has been eroding Pakistan’s competitiveness.
Monetary Policy
The overall assessment, however, remains positive, noting that headline inflation has continued to decline, and advises Pakistan to maintain a prudent monetary policy stance to keep inflation expectations well anchored.
Pakistani authorities have made significant progress in addressing fiscal and balance-of-payments imbalances.
Foreign exchange reserves are recovering fast, helped by decisive foreign exchange purchases in the context of tailwinds from lower oil prices.
“The authorities should be commended for attaining all performance criteria and structural benchmarks under the program for the seventh review, despite significant political and security challenges,” says the report.
Tax Collection
Tax revenues are slated to increase by an additional 1% of GDP and energy subsidies will be further reduced, while continuing to protect the poor through lifeline tariffs.
Public investment spending will grow in line with projected nominal GDP growth, and social protection through the Benazir Income Support Program will be further expanded.
Pakistan has also adopted a new comprehensive strategy to fix the still ailing power sector.
Other important structural reforms are underway in tax administration, central bank operations, the trade regime, and the transformation and privatization of public sector enterprises.
Reform priorities for the remainder of the program include reinforcing the gains in economic stabilization and addressing long-standing barriers to sustainable, strong, and inclusive growth.
