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Post budget vow: no possibility to rally round the IMF

The Senate Standing Committee on Finance during the post-budget 2018-19 session informed that Pakistan has no more plan to enter into new International Monetary Fund (IMF) program.

It is projected that the current account deficit would be met through loans and floating of bonds. Pakistan needs $3 billion by the end of June this year mainly for debt retirement and some other components leading to rising current account deficit. The government aims to raise $3 billion through floating of bonds and papers in international markets, while loans are likely to be obtained from World Bank and the Asian Development Bank. However, the upcoming elections in Pakistan and a challenging political environment can slow the structural reform process.

Congratulating the government team for making the successful budget 2018-19, Finance Minister Miftah Ismail in the post budget meeting in Islamabad, said his government has no intention to approach for another bailout package with the IMF as the government has taken number of good measures to avoid any loan in the future.

According to him, the government is likely to achieve 11 percent mark in the growth and expecting the GDP’s nominal growth to be slightly above 12 percent next fiscal but tax revenues have been estimated to increase by 11 percent.

Incentive package announced by the then prime minister Nawaz Sharif in January 2017 as well as the two rupee depreciations in December 2017 and March 2018 have impacted positively on the percentage rise in exports and at the same time registered a percentage decline in imports.

An overvalued rupee played a major role in making our exports uncompetitive and imports attractive and the export package contributed to higher exports yet what is relevant to note is that the trade deficit continues to widen given that our quantum of imports was much higher than the quantum of exports.

Data uploaded on the State Bank of Pakistan website indicates that in December 2017 balance of trade was a negative $14.6 billion, declining further to a negative $17.4 billion by January 2018, to a negative $19.7 billion by February and a negative $22.3 billion by end March 2018.

Exporters have appreciated the recent policy decisions by the government but claim that their input costs, including tariffs, are higher than those of their regional competitors and their sales tax refunds are around Rs200 billion. This a claim challenged by the Federal Board of Revenue.

Miftah Ismail also referred to IMF conditions as “extortion.” Given this is his first term as the Finance Minister he may not be aware of the fact that borrowing countries do negotiate the terms of any program loan. The poor performance by state-run sectors was dealt with by raising tariffs instead of improving governance.

Ismail’s continuous attempt to show a positive state of the economy is backed by certainly unreliable data for the current year due to considerably evident lack of rationalization. Further, the data is limited to the first eight months of the current year at best, given the government’s decision to present a budget two months before the end of the fiscal year end-June.

This hint a projection for the last four months of the year which is an even more exaggerated projection than in years past given political considerations due to the imminent elections.

The caretakers are mandated not to take any policy decisions other than to carry on the business of government. On the establishment’s insistence an economist heads the caretaker setup to take mitigating measures given the state of the economy. There is agreement that the caretakers maybe compelled to take some measures to deal with a crisis situation by end June.

 

IMF’s recent outlook

The IMF report on ‘Regional Economic Outlook, Middle East, North Africa, Afghanistan, and Pakistan’ states that delays in implementation or completion of structural reforms and political and policy uncertainty continue to weigh on growth in Pakistan. Improved energy supply, investment related to the China-Pakistan Economic Corridor (CPEC) and strong credit growth helped raise Pakistan’s growth to an estimated 5.6 percent in fiscal year 2018, from 5.3 percent last year.

The IMF report states that stronger prospects for the euro area should benefit the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region, especially oil importers, through higher exports.

The region should also benefit from a marginal strengthening of the outlook for China, a key partner for the region. Countries in the Middle East, North Africa, Afghanistan and Pakistan (MENAP) region need to promote higher and more inclusive growth and create jobs for their young and rapidly growing populations.

Additional efforts are also being made to bolster the business environment, with Pakistan recently strengthening its bankruptcy framework.

The global economy is expected to grow at a solid pace through next year, boosted by faster expansion in the United States and Europe but after that risks will build. In the latest update to its World Economic Outlook, the IMF still predicts world growth of 3.9 percent in 2018 and 2019, despite raising its estimates for US and EU growth compared to the January edition.

“Despite the good near-term news, longer-term prospects are more sobering,” IMF Chief Economist Maurice Obstfeld said. The sweeping US tax cuts approved in December will fuel higher growth only through next year, the IMF said. It raised its forecast by two tenths for both years, to 2.9 percent for 2018 and 2.7 percent for 2019.

The US boost accounts for most of the higher world expansion, beyond 2019 “global growth is projected to gradually decline to 3.7 percent by the end of the forecast horizon,” the report said.

In spite the fact increasing world trade helped boost growth in recent years, there has been a rise in public skepticism about the benefits, leading to a renegotiation of trade deals and increasing friction. The prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.

US President Donald Trump last month imposed steep tariffs on steel and aluminum imports and threatened to impose more on tens of billions of Chinese goods, prompting Beijing to respond in an escalating series of threats. IMF chief Christine Lagarde warned governments to “steer clear of protectionism in all its forms,” saying the trade frictions hurt poor consumers the most as costs increase, and that they also undermined a system that had broadened prosperity worldwide.

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