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IMF Predicts Gradual Return to 5% Growth in Pakistan 

The International Monetary Fund (IMF) has predicted that Pakistan's economic growth is expected to gradually return to a potential five per cent in the medium term.

This projection is contingent on sustained policy and reform implementation and adequate financial support from multilateral and bilateral partners.

Approval of $3 Billion Nine-Month Standby Arrangement

Last week, the IMF's executive board green-lit a $3 billion nine-month standby arrangement (SBA) for Pakistan to support the country's economic stabilisation programme.

The approved bailout package amounts to $2.25 billion Special Drawing Rights (SDRs), equivalent to about $3 billion, which represents 111 per cent of Pakistan's quota.

Macroeconomic Outlook

A 120-page country report released on Tuesday analyzed Pakistan's macroeconomic outlook.

The IMF foresees growth picking up moderately in the current fiscal year, reaching 2.5 per cent.

However, sustained recovery may take time due to unwinding the tight management of imports, external challenges, and the need for tight macro policies.

Inflation and Fiscal Outlook

The IMF expects headline inflation to remain lower from June onwards due to base effects from the previous year's increase in fuel and electricity prices.

However, price pressures are projected to remain elevated, with average headline inflation expected to stay above 25 per cent in FY24.

The fiscal space in Pakistan has been severely depleted, and substantial vulnerabilities remain.

The IMF recommends maintaining small primary surpluses in the coming years and making strong revenue efforts to create space for priority social and development spending.

Current Account Deficit and Debt Sustainability Risks

The current account deficit (CAD) is projected to increase to around $6.5 billion in the current fiscal year, and the IMF suggests that it should remain moderate at around 2 per cent of GDP over the medium term.

The report highlights risks to debt sustainability due to the scarcity of external financing and large gross financing needs.

Policy Recommendations

The IMF recommends broad-based reforms to improve Pakistan's fiscal framework, enhance social spending, and boost structural reforms to lay the foundation for strong and resilient growth.

It emphasizes the importance of tighter monetary policy to reduce inflation and stabilize expectations.

Additionally, the report urges the end of administrative controls on the current account and a return to a market-determined exchange rate to reduce external imbalances and rebuild foreign reserves.

Addressing Structural Bottlenecks and Financial Stability

To resolve long-standing structural bottlenecks, the IMF advises strengthening governance, transparency, and efficiency of state-owned enterprises, boosting the business environment, and enhancing job creation and investment.

It also stresses the need to combat corruption effectively, bolster climate change resilience, and ensure timely provision of key macroeconomic data.

Heightened monitoring of financial stability risks and continued efforts to safeguard the financial sector soundness and implement anti-money laundering measures are also essential.

Analysis by Uzair Younus, Director of Pakistan Initiative

Political economist Uzair Younus, director of the Pakistan Initiative at the Atlantic Council's South Asia Centre, considers the IMF's report a "sobering report on the state of Pakistan's economy and where it is headed."

He highlights the significant gross external financing requirements projected for the next three years and stresses the need for prudent policies to meet them.

Whoever is in power for the next few years will face considerable challenges in navigating the country's economic situation.

(Courtesy: Dawn)