FeaturedNationalVOLUME 19 ISSUE # 36

IMF’s outlook on Pakistan amid global financial challenges

The International Monetary Fund (IMF) has reaffirmed Pakistan’s economic growth forecast at 3.5% for the current fiscal year. This comes amidst concerns of prolonged high interest rates and global disinflation trends that threaten to place continued pressure on the populace.

The IMF’s steady growth projection, initially made in April, has been reiterated following a recent agreement on a $7 billion bailout, highlighting the critical economic challenges and the need for strategic policy interventions.

The International Monetary Fund (IMF) has reiterated Pakistan’s economic growth prediction at 3.5% for the ongoing fiscal year, although it signaled that the deceleration in global disinflation would perpetuate pressure on the populace amidst persistently high interest rates. The IMF’s reaffirmed growth outlook of 3.5% has been underscored just a week after its officials reached a consensus with Pakistani authorities on a $7 billion, 37-month bailout. This accord was achieved through meticulous discussions and examination of financial and economic data, including the fiscal projections for 2024-25.

The Pakistani government has set an ambitious growth target of 3.6% for the current fiscal period. In its World Economic Outlook Update 2024, the IMF observed that overall risks to the global economic forecast remained balanced as of April. However, some short-term risks have gained significance, posing potential challenges for emerging markets and oil-importing nations such as Pakistan.

These risks include potential inflationary pressures due to sluggish progress in reducing service sector inflation and price increases driven by renewed trade or geopolitical tensions.

IMF staff projections reflect upward adjustments to commodity prices, anticipating a 5% rise in non-fuel prices in 2024. Conversely, energy prices are expected to decrease by approximately 4.6% in 2024, which is a less significant decline than previously projected in April. This adjustment considers elevated oil prices resulting from substantial production cuts by Opec+ (the Organization of the Petroleum Exporting Countries, inclusive of Russia and other non-Opec oil exporters) and continued, albeit reduced, price pressures stemming from the Middle East conflict.

The IMF noted that the monetary policy rates of major central banks are still projected to decrease in the latter half of 2024, with the pace of normalization varying according to different inflationary environments. The risk of sustained high inflation has increased the likelihood of prolonged high interest rates, thereby exacerbating external, fiscal, and financial risks. Additionally, the extended appreciation of the dollar, due to rate disparities, could disrupt capital flows and hinder planned monetary policy easing, which could negatively affect growth.

“Persistently elevated interest rates could further escalate borrowing costs and jeopardize financial stability if fiscal reforms do not counterbalance higher real rates amid diminished potential growth,” according to the IMF.

Pakistan ranks among the top nations grappling with significant borrowing needs and faces higher interest rates amid sluggish growth cycles. Nearly all government revenue is consumed by debt servicing.

The report emphasized that policies promoting multilateralism and swift implementation of macro-structural reforms could enhance supply gains, productivity, and growth, with positive global repercussions.

The IMF urged the fortification of economies by maintaining efforts to restore price stability and addressing the residual effects of recent crises, including replenishing depleted buffers and sustainably boosting growth. In the short term, this necessitates careful calibration and sequencing of policy measures.

It advised central banks to avoid premature easing and to remain prepared for further tightening if necessary. As fiscal maneuvering space becomes limited, it is crucial to adhere to fiscal consolidation targets, supported by robust fiscal frameworks and resource mobilization.

In emerging markets and developing economies, recent policy divergences underscore the need to manage risks associated with currency and capital flow volatility. Since economic fundamentals remain the primary driver of dollar appreciation, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to maintain inflation near the target.

Foreign reserves should be used judiciously and preserved to handle potentially severe outflows in the future. Where possible, macro-prudential policies should mitigate vulnerabilities stemming from large exposures to foreign-currency-denominated debt. Beyond immediate challenges, policymakers must act now to revitalize declining medium-term growth prospects.

Although the emigration of young, educated individuals can impact source countries, these costs can be mitigated. Policies that leverage diaspora networks, maximize benefits from remittances, and expand domestic labor market opportunities are viable solutions.

In light of persistent financial challenges, the IMF emphasizes the necessity for prudent economic policies and structural reforms to sustain growth and stability. For Pakistan, managing elevated borrowing costs and ensuring financial stability require concerted efforts in fiscal consolidation and resource mobilization. By adopting policies that enhance productivity, leverage diaspora networks, and expand labor market opportunities, Pakistan can navigate its economic challenges and foster a more resilient future. The IMF’s guidance underscores the importance of maintaining vigilance in monetary policy while strategically utilizing foreign reserves to mitigate potential risks and support long-term economic vitality.

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