The International Monetary Fund has underlined that Pakistan needs to let its exchange rate stay elastic while acting as a shock absorber for the shocks to the economy and providing an overall cushion to rebuild the foreign reserve. The IMF underscored the critical need for sustained programme implementation, stronger governance, and moving away from the state-led growth model, but reforms in taxation, energy, and the business environment can encourage sustainable long-term stability.

The IMF revised its forecast for Pakistan’s economic growth upward at 3.2%, while lowering its inflation projection to single digits, while cautioning against pursuance of ambitious growth at the cost of debt sustainability. The IMF’s executive board stressed matching growth objectives with fiscal discipline as well as effective communication toward better support of necessary reforms. It welcomed improvement in the economic landscape of Pakistan. “Economic growth has returned, external pressures have eased, and reserves have doubled over the past year, while inflation has declined significantly,” said Kenji Okamura, IMF Deputy Managing Director. Yet Okamura also noted that in light of the positive changes observed, the country’s major structural issues remain on the horizon, and reform efforts would need to continue being maintained in order to lay a foundation for enhancing economic resilience and prospects.

The IMF’s board of directors agreed on consultation with Pakistan and adopted a 37-month Extended Fund Facility amounting to $7 billion. In fact, Pakistan has seen the provision of the first tranche of $1.02 billion. The growth forecast of the IMF is 3.2% which is more optimistic than that which the ADB put forth, and also more optimistic than the target of 3.5% set by Pakistan’s government for this fiscal year.

It is hoped that by the end of the fiscal year, average inflation will be brought down to 9.5%, much lower than the government targeted at 12% and this year’s projection by the IMF at 15%. The better inflation outlook also exceeds the recent ADB forecast of 15%. This improved inflation outlook should give the SBP room to slightly ease its policy rate at present 17.5%. However, the IMF also warned of debt sustainability in Pakistan. “Given the ambitious growth projections, there is no room for policy slippages without jeopardizing debt sustainability,” the IMF said. The debt-to-GDP ratio will increase to 71.4% in this fiscal, despite the IMF targeting a primary surplus budget to stand at 2% of GDP. Public and publicly guaranteed debt will increase to 75.1% of GDP from 73%.

The executive board of the IMF welcomed steps toward a more equitable tax system but still insisted on the need for more revenue mobilization through expansion in the tax base and improvement in the tax administration. They appreciated the remarkable progress Pakistan has made in the strengthening of policymaking under the SBA, which helped restore stability to the economy. However, at the same time, they cautioned that risks remain high and that the road to stability is narrow. The directors underscored the need for strong commitment to sound policies and structural reforms under the Extended Fund Facility for sustainable, inclusive growth with reduced debt.

The IM projects gross official foreign exchange reserves to rise to $12.8 billion by June next year, though still short of the minimum level to cover three months of imports. The exchange rate needs to act as a shock absorber for Pakistan and, importantly, be decisive about competitiveness to support reserve rebuilding. While steady at Rs279 a dollar, the government has nonetheless been pushing for gradual devaluation that will help maintain export competitiveness. As such, the IMF restated that reinforcement of the reform program should be accompanied by capacity building as well as close cooperation with development partners in terms of securing additional financing and market confidence. They also underlined that more and more frequent monitoring of programme progress should be adopted, and more regular consultation with the board of the executive of the IMF should be held, in addition to doing thorough contingency planning to ensure success in the programme. In addition to this, the directors called on Pakistan to shift away from a state-led growth model, strengthen the business environment, promote freer competition, and reverse declining living standards.

The IMF has recognized the relentless effort Pakistan has made to restore economic stability through sustained implementation of policies under the former SBA. Growth in the economy seems to have picked up, notably from agriculture, with inflation dropping down to single-digit levels as a result of tight fiscal and monetary policies. Having a controlled current account and a stable foreign exchange market, Pakistan has begun to rebuild its reserve buffers.

The new IMF program is one that is enhancing policymaking credibility and enforcing macroeconomic stability through the consistent application of sound economic policies, which would also be accompanied by widening the tax base. Kenji Okamura called for increased revenue generation through widening of the tax base, scrapping special tax regimes, and putting a more equitable tax burden on under-taxed sectors like industrialists, developers, and large-scale agriculture. He noted that timely adjustments in the energy tariffs under the previous programme helped stabilize Pakistan’s energy sector by checkmating circular debt. However, he underlined that deep cost reforms are required for the long-term viability of the sector, which may even call for revisiting energy contracts with China. He also developed more generic reform priorities such as speeding up the accelerated agenda in SOE reform, eliminating distortive markets, attaining a level playing field, strengthening governance and anti-corruption frameworks, and continuing efforts in building climate resilience.

The IMF realizes that Pakistan has moved forward toward a stable economy but sustained efforts are still needed to ensure growth. The increased flexibility in the exchange rates and the deeper structural reforms regarding taxation, energy, and governance would stabilize its economic resilience and turn around declining living standards. These shall be affected by the new program from the IMF since the tax base should be widened and competition increased, particularly by more secure additional financing that will guarantee a sustainable long-term outcome of prosperity in the country.