By Staff Reporter
ISLAMABAD: The International Monetary Fund (IMF) said Pakistan’s economy has shown signs of improvement, with growth expected to reach 2 percent in the current fiscal year, but warned that inflation remains high and more reforms are needed to sustain the recovery.
The IMF, which approved a $3 billion loan program for Pakistan in July 2023, commended the authorities for their strong revenue performance and fiscal discipline in the first quarter of the fiscal year, which resulted in a primary surplus of 0.4 percent of gross domestic product (GDP).
“Macroeconomic conditions have generally improved, with growth of 2 percent expected in FY24 as the nascent recovery expands in the second half of the year, the IMF said in a statement.
Pakistan’s gross reserves increased to $8.2 billion in December 2023, up from $4.5 billion in June, while the exchange rate has been broadly stable. The current account deficit is expected to rise to around 1.5 percent of GDP in FY24 as the recovery takes hold.
However, the IMF warned that inflation remains high, affecting particularly the more vulnerable, and urged the State Bank of Pakistan (SBP) to maintain a tight monetary policy stance to ensure that inflation returns to more moderate levels.
“Inflation remains elevated, although with appropriately tight policy, this could decline to 18.5 percent by end-June 2024,” the Fund said in the statement, which was part of the Executive Board announcement of the completion of the first review of Pakistan’s Stand-By Arrangement (SBA).
The IMF board allows the release of $700 million of the second tranche, bringing total disbursements under the arrangement to $1.9 billion.
The IMF also called for more structural reforms to improve the fiscal framework, the power sector, the financial sector, the business environment, the governance and anti-corruption institutions, and the climate resilience of the economy.
“Pakistan’s program performance under the Stand-By Arrangement has supported significant progress in stabilizing the economy following significant shocks in FY2022-23,”Antoinette Sayeh, Deputy Managing Director and Chair, said in the statement.
“There are now tentative signs of activity picking-up and external pressures easing. Continued strong ownership remains critical to ensure the current momentum continues and stabilization of Pakistan’s economy becomes entrenched.”
Sayeh said the country’s strong revenue performance in FY24Q1 as well as federal spending restraint have helped to achieve a primary surplus in line with quarterly program targets.
“However, in the context of pressures, including from provincial spending, efforts at mobilizing revenues and ongoing non-priority spending discipline need to continue to ensure that the budgeted primary surplus and debt goals remain achievable,” she added.
“Going forward, broad-based reforms to improve the fiscal framework—mobilizing additional revenues particularly from non-filers and under-taxed sectors and improving public financial management—are required to create fiscal space for further social and development spending.”
The IMF’s deputy managing director praised the country for taking challenging steps to bring both electricity and natural gas prices closer to costs in 2023, and stressed the need for continuing with regularly-scheduled adjustments and pushing cost-side power sector reforms to improve the sector’s viability and protect fiscal sustainability.
“Pakistan also needs a market-determined exchange rate to buffer external shocks, continue rebuilding foreign reserves, and support competitiveness and growth. In parallel, further action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is necessary to support financial stability.”
Sayeh also emphasized the importance of boosting jobs and inclusive growth in Pakistan, and urged the authorities to continue protecting the vulnerable through the Benazir Income Support Program (BISP) and accelerating structural reforms, most notably around improving the business environment and leveling the playing field for investors, advancing the state-owned enterprise (SOE) reform agenda and safeguards related to the Sovereign Wealth Fund, strengthening governance and anti-corruption institutions, and building climate resilience.
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