Pakistan's inflation to rise to 13 percent: IMF forecasts

Dunya News

The real GDP growth is expected to slow to 2.4% in the current fiscal year to June 2020.

ISLAMABAD (Dunya News) – The International Monetary Fund (IMF) has approved a three-year, $6 billion loan package for Pakistan on Wednesday to rein in mounting debts and stave off a looming balance of payments crisis, in exchange for tough austerity measures.

According to IMF forecasts, real GDP growth is expected to slow to 2.4% in the current fiscal year to June 2020, down from 3.3% in the year just ended.

Furthermore, the global moneylender has predicted inflation rising to 13%.

The central bank, which controls the currency, has hiked interest rates to 12.25% and slashed the rupee to historic lows against the dollar, but this has piled more pressure on households facing inflation running at almost 9%.

In addition, in a bid to cut public debt, the government has set ambitious tax and revenue plans, despite failing to meet the previous year’s targets and hiked prices in the creaking energy sector, where mounting debt backlogs have acted as a growing drain on government resources.

In a press release issued yesterday, the IMF stated that the EFF-supported program will help Pakistan to reduce economic vulnerabilities and generate sustainable and balanced growth focusing on: a decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending; a flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves; to eliminate quasi-fiscal losses in the energy sector; and to strengthen institutions and enhance transparency.

The Executive Board’s approval allows for an immediate disbursement of US$1 billion. The remaining amount will be phased over the duration of the program, subject to four quarterly reviews and four semi-annual reviews.

Following the Executive Board discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:

“Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth. In this context, the authorities’ program aims to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyze significant international financial support, and promote strong and sustainable growth.

“A decisive fiscal consolidation is key to reducing the large public debt and building resilience, and the adoption of the FY 2020 budget is an important initial step. Achieving the fiscal objectives will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by the provinces to support the consolidation effort, and effective public financial management to improve the quality and efficiency of public spending.

“Protecting the most vulnerable from the impact of adjustment policies will be an important priority. This will be achieved by a significant increase in resources allocated to key social assistance programs, supporting measures for the economic empowerment of women, and investment in areas where poverty is high.

“A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan’s (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability.

“An ambitious agenda to strengthen institutions and remove impediments to growth will allow Pakistan to reach its full economic potential. Addressing structural weaknesses in the energy sector and improving the governance of state-owned enterprises will ensure efficiency and better services, thus boosting economic activity. Moreover, improving the business climate, strengthening efforts to fight corruption, and enhancing the AML/CFT framework will create an enabling environment for private investment and job creation.

“The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the program to achieve its objectives.”

Program Summary

The authorities’ comprehensive economic reform program, supported by the EFF, aims to stabilise the economy and lay the foundation for robust and balanced growth. Key elements include:

A decisive fiscal consolidation to reduce public debt and build resilience, starting with the adoption of an ambitious FY 2020 budget. The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilization by 4 to 5 percent of GDP at the federal and the provincial level over the program period;

Expanding social spending, including through the strengthening and broadening of safety nets to support the most vulnerable;

A flexible, market-determined exchange rate to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks. This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank;

Energy sector reforms to eliminate quasi-fiscal losses and encourage investment, including by depoliticizing gas and power tariff setting and over the program period, gradually bringing the sector to cost recovery; and

Structural reforms through strengthening institutions, increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.

Strong financial assistance by Pakistan’s international partners will support the EFF. The Fund-supported program is expected to coalesce broader support from multilateral and bilateral creditors in excess of US$38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years.