Press Release No. 12/379

Press Release No. 12/379
October 4, 2012

An International Monetary Fund (IMF) team, led by Mr. Jeffrey Franks, visited Dubai and Islamabad during September 26- October 3, 2012 to conduct Post-Program Monitoring (PPM) discussions with the Pakistani authorities. PPM discussions are standard in countries that have recently had large IMF arrangements. At the conclusion of the team’s work today, Mr. Franks issued the following statement:

“The IMF mission held constructive discussions with government and central bank officials on recent developments, the outlook for Pakistan’s economy for the rest of FY 2012/13 and beyond,¹ and on economic policies to maintain growth and macroeconomic stability in the context of a difficult global economic environment. We also discussed structural reforms, especially in the energy sector, to lay the foundation for stronger and sustainable economic growth. The mission is grateful for the cooperation and support extended by senior officials and staff of the government and the State Bank of Pakistan.

“Pakistan faces a challenging economic outlook. GDP growth in 2012/13 is projected to be in the 3-3½ percent range, which needs to accelerate in order to absorb the growing labor force. Inflation has fallen recently but is expected to be back in double digits by the middle of next year if corrective measures are not taken to reverse monetary financing of the fiscal deficit. Pakistan’s external position is weakening. While the current account deficit is not large by international standards, financial flows have weakened and central bank reserves have fallen.

“Decisive and far-sighted action is needed to address this challenging outlook. Discussions on economic policy focused on diligent management of the budget deficit, reducing inflation, and structural reforms. The government and the IMF team agree on the need to contain the budget deficit to help lower inflation, reduce crowding out of private sector credit, and ensure debt sustainability. In our view, this requires significant corrective measures; the fiscal deficit is otherwise likely to exceed the budget target by a significant margin. To rein in the fiscal deficit, both revenue and expenditure measures will be required. On the revenue side, while there has been some improvement in collections, tax revenue should be raised further through sustained policy measures and strengthened administration both at the federal and provincial level, including a significant step-up in the Federal Board of Revenue’s enforcement activities. On the expenditure side, untargeted subsidies should be reduced, while fully protecting the most vulnerable members of society through targeted assistance schemes. The mission welcomed the authorities’ intention to prudently manage public spending, despite pressures associated with the electoral cycle, and noted that it is crucial that expenditure restraint also apply to provincial governments, which now have increased spending responsibilities. The authorities also signaled their continued commitment to trying to meet their fiscal target.

“Underlying inflation remains high and represents a regressive tax that disproportionately hurts the poor. The ultimate goal of the State Bank of Pakistan (SBP) should be to bring inflation down significantly by using its policy tools. Reduced recourse to central bank financing by the government is also critical for a durable reduction in inflation. While the banking sector is well-capitalized and profitable, the level of nonperforming loans is relatively high.

“Addressing macroeconomic imbalances will help supporting higher growth, but the energy problems facing Pakistan today are perhaps the largest single impediment to higher economic growth and are a major factor behind macroeconomic imbalances. The mission stressed that a comprehensive approach to reform is needed to tackle these problems, which include the lack of full cost recovery, resulting in costly and untargeted subsidies, governance and efficiency difficulties in energy distribution, regulatory inadequacies, and insufficient investment in new energy production. Tackling the energy problems will also benefit macroeconomic stabilization. In addition, other structural reforms are also needed to boost growth, including measures to enhance the business climate and to restructure public sector enterprises beyond the energy sector.

“The IMF remains committed to the ongoing dialogue with the Pakistani authorities on their reform program.”

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¹ Pakistan’s financial year runs from July 1 to June 30.