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Comments on IMF reports

Dr Ayub Mehar, one of the leading economists in Pakistan, shared the following with PAGE regarding IMF Reports:

Within just 10 days last year, three international eminent institutions released their reports on Pakistan economy: First, World Trade Organization (WTO) issued its ‘Trade Policy Review’ for Pakistan which discusses the implementation and outputs of Pakistan Trade Policy Framework 2015-18. Second, Asian Development Bank (ADB) issued its report on Pakistan economy in global comparison. Third, the International Monetary Fund (IMF) released its statement on the discussion between IMF representatives and Pakistani delegation held in Dubai from March 28 to April 05, 2017. IMF team was led by Harald Finger while Finance Minister Ishaq Dar led Pakistani team, which included State Bank of Pakistan (SBP) Governor Ashraf Wathra. According to Article IV Consultation of IMF program, this was a routine meeting.

The common point in all these three reports is the severe concern shown by global community on the declining exports of Pakistan. Though IMF statement recognized that after three years of reforms, Pakistan has strengthened its macroeconomic resilience and economic outlook, providing an opportunity to build on recent progress with structural reforms and set the economy on a higher growth path. However, this statement which is released by IMF is subject to achieving two conditions: (1) Structural Reforms, and (2) Setting the economy on higher growth path.

So far as structural reforms are concerned, it seems extremely difficult. ‘Structural Reforms’ is always a painful process which may affect the vote bank of ruling party and its support from the business community. In structural reforms government has to further strengthen its tax collection ability, expedite privatization process and further withdrawal of grants, subsidies and transfer payments. Such reforms in election year may affect the government support adversely. For setting the economy of higher growth path, government has taken some steps but those steps are not in consistency of fiscal reforms and policy. Improvement in the law and order situation, mitigating energy crisis and China Pakistan Economic Corridor (CPEC) are included in those steps which may set the path for higher economic growth. These steps are mostly concerned with Planning Commission, Ministry of Power and Interior Ministry. All these efforts are being made in different direction and there is coordination to conclude that how these efforts will be transformed into required rate of growth in GDP.

In the current state of economy Pakistan requires 7 percent rate of growth in GDP. Several think tanks and policy making institutions have agreed on this required rate of growth even Finance Minister has admitted several times that we require 7 percent rate of growth to reduce poverty and creating employment opportunities. IMF expected economic growth to reach 5 percent in fiscal year 2016-17.

It is further mentioned in the statement released by IMF team that this 5 percent rate of growth will be achieved because of (1) improving in global economic conditions, (2) rising investment related to the China-Pakistan Economic Corridor (CPEC), and (3) recovering agriculture. It is quite obvious that all these three factors are not the components of government fiscal policies. So how even 5 percent growth can be classified as an achievement of the government.

IMF team mentioned that over the medium-term, growth could accelerate to about 6 percent. Again it is a negative statement because its states that even in medium-term Pakistan will not be able to achieve the minimum required rate of growth – 7 percent. According to IMF even this 6 percent growth will be subject to:

1- Stepping-up CPEC and other investments
2- Improvement in energy supply, and
3- Continuity of structural reforms

The IMF mission noted that “slower-than-expected growth of large-scale manufacturing and stagnant exports are weighing on growth prospects”. This statement warn that without improving in exports and acceleration in large-scale manufacturing the GDP growth targets will not be achieved.

IMF report has indicated another drastic trend that the current account deficit is expected to reach 2.9 percent of GDP in current fiscal year (2016-17). Last year it was 1.7 percent. The trade balance, workers’ remittances and foreign investment are the main components of current account balance. Its declining trends are summing up these three components. The declining trend of export is not only astonishing but also shocking because in the history of Pakistan slow growth in exports accompanied by high growth in imports created higher deficit in current account. But since last 3 years exports are continuously declining. Now slow growth in export in not a concern; now concern is the negative growth in export. The history of Pakistan has never seen negative growth in exports before these 3 years.

Despite negative growth in export the economy has survived on external fronts because of the lower growth in imports due to declining oil prices and higher growth in workers’ remittance. However, now the oil prices are again increasing and workers’ remittances are start to decline. In this situation the declining exports cannot be compensated which is the indicator of wiping out of foreign exchange reserves.

Consequently, Pakistan has to engage in another agreement with the IMF and furthermore the value of Pak rupee may be depreciated which lead the inflation and poverty. The government has to focus on its export enhancement strategy on war footing basis as further losses cannot be compensated.

The International Monetary Fund has urged Pakistan to strengthen its export and manufacturing industries. Regarding declining exports, it has ways been mentioned that this declining is the consequence of global recession, which is absolutely a false statement. The global recession is not a long term (3 years) phenomenon. Moreover, global recession hit the developed countries first and the developing and least develop countries are the least sufferers of global recession. But exports from Pakistan have become a constant phenomenon. The government has been introducing several incentive packages to enhance exports. Monetary and fiscal incentives are included in these packages. But it has been clearly now observed that no package was effective for export enhancing strategy. At the same time it can be noted that size of global trade is growing at around 10 percent per year, which is the indicator that global exports are increasing.

At the same time continuous decline in exports from Pakistan is unthinkable. In global comparison Pakistan is included in the bottom most countries of current account deficit. The current account deficit to GDP ratio which was 1.7 percent last year, now expected to reach at 2.9 percent as indicated by IMF. This is the worst position not in the history of Pakistan but also in global comparison. The same situation has been following in case of Foreign Direct Investment (FDI).

IMF further indicates that average headline inflation is expected to be contained at 4.3 percent. Though government has reputedly indicates the lower inflation as its most important success. But, the fact is that the lower inflation has become a global phenomenon. The declining trends in oil and other commodity prices a worldwide phenomenon, which reduced the inflation. Even the CPI based rate of inflation in Pakistan is still higher than other countries. The declining prices favored Pakistan by reducing impost bill, however, this advantage was not fully transferred to the consumers in Pakistan because of higher rate of GST on ad-velorum basis.

The rate of inflation in other developing countries are 2 percent, which is more than 4 percent in Pakistan. The drastic side of the story is that this inflation is based on the Consumer Price Index (CPI), the picture is not similar on Sensitive Price Index (SPI) which covers the 10 basic commodities where prices are not declining. The consumers in Pakistan can observe the increase in food prices including milk, most of the vegetables, and meet etc. If rate of growth in Sensitive Price Index (SPI) is greater than Consumer Price Index (CPI), it is the indicator that burden of economic deterioration is being transferred on low income groups, which is the indicator of enhancement of poverty.

IMF has further indicated that “Stronger fiscal consolidation efforts will be needed to make up for the lower-than-expected revenue in the first half of this year”.

Harald Finger also stated that greater exchange rate flexibility and efforts to improve export sector productivity were needed to address the widening trade deficit as well as strengthen the economy’s ability to absorb medium-term CPEC-related and other capital outflows. In fact this last statement released by IMF is a hard phenomenon in soft words. Whatever stated by Mr. Finger is not a soft and simple think; it states that the medium-term (next 3 to 5years) may be hard for the economy.

The official statement shows the focus on the following topics:

1- Discussions on the reforms needed to enhance Pakistan’s social safety nets,
2- Restructuring and seeking private sector participation in loss-making public enterprises,
3- Promoting financial inclusion and deepening, and
4- Improving the business climate

All these four areas are concerned with the private sectors initiatives. How private sector contributes, it is too early to respond this question. Though IMF report has indicated that outflows of capital to China after CPEC will further affect the economy of Pakistan adversely, which is a reflection that private sector of Pakistan may not be get its due share from the benefits of CPEC. Obviously it is because of the lack of awareness about the changing business scenario and the lack of interest.

It is noteworthy that in its last report IMF had appreciated the economic outcome and policies of Pakistan but this time it has shown severe reservations. In fact the declining indicators are the consequent of the inappropriate human resources for economic institutions. In the beginning of present government it was publicize that dynamic, dedicated and relevant qualified persons will be inducted to run these institutions. But every institution, which belongs to economic sector, has failed to achieve its objectives. It included growth in exports and inflow of FDI. We are still at the stage where Pakistan is producing 12 percent of world cotton but our share in the textile exports is less than one percent.

The report of Asian Development Bank has consistency with the IMF report. Asian Development Banks said that Pakistan’s falling exports for the third consecutive year have been due to falling commodity prices in international markets. Pakistan falling exports and remittances cause of concern as it has double the current account deficit in the current fiscal year. This combined with falling remittances which dropped by 1.9 percent to 10.9 billion dollars in the six months, declined by almost 10 years also put pressure on the current account deficit as the Gulf countries cut spending on falling crude oil prices. But since last two months the crude oil price has gone up which might help recover remittance figures but it will add to import bill of the country.

The present scenario requires the drastic changes in policy making and human resource fronts. For the correct policy formulation we need correct peoples. In this history of nations it is correct that “Lamhomaienkeigaikhatta, sadyonkisazahoti hay“.

GROWTH AND INFLATION: GLOBAL COMPARISON
Country
GDP Growth (%)
Industrial Growth (%)
CPI (%)
Latest
2017
Latest
Last Year
2017
China
6.8
6.5
6.3
2.3
2.3
Euro area
1.7
1.6
0.6
0.0
1.6
India
7.0
7.2
2.7
5.3
4.6
Indonesia
4.9
5.2
4.5
4.4
4.3
Japan
1.6
1.2
4.8
0.2
0.7
Malaysia
4.5
4.4
3.5
4.2
3.2
Pakistan
5.7
5.2
0.8
3.9
4.9
Russia
0.3
1.4
(-2.7)
7.3
4.5
Saudi Arabia
1.4
0.8
4.2
2.0
Singapore
2.9
2.1
12.6
(-0.8)
1.1
South Korea
2.4
2.5
6.6
0.8
1.8
Taiwan
2.9
1.8
10.6
2.0
2.1
Thailand
3.0
3.5
(-1.5)
(-0.5)
1.3
EXTERNAL AND INTERNAL BALANCES: GLOBAL COMPARISON
Country
Trade Balance
Current Account Balance
Budget Balance % of GDP 2017
Last 12 months ($ billion)
% of GDP, 2017
On 5th April ($ Billion)
China
467.9
1.7
6.90
-4.1
Euro area
292.6
3.0
0.94
-1.6
India
(-100.8)
(-1.0)
64.0
-3.2
Indonesia
10.4
(-2.0)
13,321
-2.1
Japan
45.3
3.5
111
-5.3
Malaysia
21.1
3.1
4.43
-3.1
Pakistan
(-29.2)
(-1.7)
104
-4.8
Russia
94.2
2.8
56.0
-2.9
Saudi Arabia
28.9
(-2.1)
3.75
-7.3
Singapore
48.1
19.3
1.40
-1.0
South Korea
84.3
6.4
1,124
-1.0
Taiwan
15.6
12.1
30.0
-0.7
Thailand
17.9
11.7
34.0
-2.3

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