IMF Executive Board Concludes 2015 Article IV Consultation with Pakistan

Press Release No. 16/05
January 12, 2016

On December 18, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Pakistan.1

Starting from a difficult position in 2013, Pakistan has made substantial progress in reducing near-term economic vulnerabilities. Economic growth gradually increased from 3.7 percent in fiscal year (FY) 2012/13 to 4.2 percent in FY2014/15. During the same period, efforts to reduce power subsidies and raise tax revenue have lowered the budget deficit from 8.4 to 5.4 percent of GDP, although part of this adjustment reflected clearance of quasi-fiscal liabilities in the energy sector in 2013. Monetary and financial sector policies have remained prudent in recent years, and the banking system remains sound. Inflation has declined significantly, helped in part by low international commodity prices.

The external position has recently strengthened although medium-term vulnerabilities remain. Helped by low oil prices and strong remittances, the external current account deficit narrowed to one percent of GDP in FY2014/15 and foreign exchange reserves of the SBP have been rebuilt from 1.5 months of imports in FY2012/13 to 3.8 months of imports in September 2015. However, foreign direct investment (FDI) fell by a half in FY2014/15, albeit with some recovery since, and exports have declined. The economy’s competitiveness has been hampered by security issues, a business climate that lags regional peers and a real effective exchange rate appreciation of 17 percent over the past two years.

Long-standing structural impediments and a difficult security setting remain key obstacles to growth and investment. Pervasive tax evasion combined with still prevalent tax exemptions and loss-making state-owned enterprises constrain the fiscal space for public investment and social spending. The resulting reliance on domestic financing risks to reduce access to credit and investment by the private sector. Despite recent improvements, the energy sector still accumulates payment arrears and is unable to meet growing demand. Several growth-supporting structural reforms are in various stages of preparation or implementation, including in the energy sector, privatization/ restructuring of public enterprises, tax administration, as well as monetary and financial sector policies.

Pakistan’s macroeconomic outlook is favorable, contingent on sustained implementation of key reforms, amid downside risks emanating from a more challenging external environment. In the medium term, growth is expected to reach about 5.5 percent, and inflation is expected to gradually rebound to the SBP’s target of mid-single digits.

Executive Board Assessment2

Directors welcomed Pakistan’s continued improvement in economic activity and the fiscal and external positions, on the back of low oil prices and strong remittances. They commended the authorities for significantly reducing near-term vulnerabilities in recent years. Directors noted nevertheless that longstanding structural weaknesses and security concerns continue to hold back growth prospects. They emphasized the need to boost potential growth and enhance the economy’s resilience and competitiveness. Achieving these objectives will require sustained fiscal consolidation, swift execution of the economic reform program, and a further build-up of international reserves.

Directors stressed the importance of further reducing public debt to more sustainable levels, while preserving room for higher spending on critical infrastructure, educational, and social programs. They welcomed the additional measures taken to close the revenue shortfall and encouraged comprehensive, front-loaded reforms to mobilize revenue, including by

base-broadening, streamlining concessions and exemptions, improving tax compliance, and enhancing coordination with provincial tax authorities. At the same time, Directors saw a need to continue strengthening frameworks for public debt and financial management, further reducing energy subsidies, and restructuring or privatizing loss-making public enterprises.

Directors agreed that monetary policy should remain prudent and focused on price stability. They supported targeting positive real interest rates and keeping inflation expectations well anchored. Directors commended the authorities for progress in improving the monetary policy framework, notably the establishment of an independent monetary policy committee. They encouraged further steps to enhance monetary policy transmission and prepare for a shift toward inflation targeting over the medium term, as circumstances permit. Directors encouraged the authorities to implement the remaining recommendations of the 2013 safeguards assessment, aimed at enhancing central bank independence and reducing fiscal dominance.

Directors observed that the banking sector remains sound and profitable, and good progress has been made with bank capitalization. They supported ongoing efforts to bolster

regulatory and supervisory frameworks, set up a deposit insurance scheme, and improve access to finance. Directors also stressed the need to continue strengthening the framework against money laundering and the financing of terrorism, including by widening the coverage of tax crimes.

Directors underlined the importance of advancing critical structural reforms to restore competitiveness and foster medium-term, inclusive growth. They called for continued effort in the areas of energy sector reform, privatization, the business climate, and trade integration. Greater exchange rate flexibility would help absorb exogenous shocks and complement a comprehensive strategy for improving export performance. Directors also encouraged initiatives to promote gender equality and expand targeted social protection.



Pakistan: Selected Economic Indicators, 2010/11–2015/16 1/
 

Population: 189.9 million

(2014/15) Per capita GDP:

US$1,510 (2014/15) Poverty

rate: 12.7 percent (2010/11)

Main exports: Textiles ($13.5 billion, 2014/15)

Unemployment: 6.0 percent (2013/14)

 
  2010/11 2011/12 2012/13 2013/14 2014/15 2015/16  
            Eighth Review Proj.
 
               
(Annual percentage change)              

Output and prices

             

Real GDP at factor cost

3.6 3.8 3.7 4 4.2 4.5 4.5

GDP deflator at factor cost

19.5 5.7 7.1 6.9 3.6 4.7 3.7

Consumer prices (period average) 2/

13.7 11 7.4 8.6 4.5 4.7 3.7

Consumer prices (end of period) 2/

13.3 11.3 5.9 8.2 3.2 6 4.5

Pakistani rupees per U.S. dollar (period average)

2 4.4 8.4 6.4 -1.5 - -
(In percent of GDP)              

Saving and investment

             

Gross saving

14.2 13 13.9 13.7 14.1 14.8 14.4

Government

-4.2 -5.3 -5.2 -1.4 -1.6 -0.4 -0.5

Nongovernment (including public sector enterprises)

18.4 18.3 19 15.1 15.7 15.2 14.8

Gross capital formation 3/

14.1 15.1 15 15 15.1 15.3 15.3

Government

2.5 3.4 3.2 3.5 3.7 3.8 3.7

Nongovernment (including public sector enterprises)

11.6 11.7 11.7 11.5 11.4 11.5 11.6

Public finances

             

Revenue and grants

12.6 13 13.5 15.3 14.5 15.4 15.5

Expenditure (including statistical discrepancy)

19.6 22 21.9 19.9 19.2 19.6 19.6

Budget balance (including grants)

-6.7 -8.6 -8.4 -4.9 -5.3 -4.2 -4.2

Budget balance (excluding grants)

-7 -8.9 -8.5 -5.7 -5.4 -4.3 -4.3

Primary balance

-2.9 -4.2 -3.9 -0.3 -0.5 0.1 0.1

Total general government debt 4/

55.3 60.5 62.9 63.7 63.2 62.4 63.2

External general government debt

22.4 22.4 20.1 19.9 18.5 18 19

Domestic general government debt

32.9 38.1 42.8 43.8 44.8 44.4 44.2
(Annual changes in percent of initial stock of broad money, unless otherwise indicated)              

Monetary sector

             

Net foreign assets

4.1 -3.8 -3.4 3.7 2.2 1.6 1.9

Net domestic assets

11.8 17.9 19.3 8.8 11 10.8 10.1

Broad money (percent change)

15.9 14.1 15.9 12.5 13.2 12.4 12

Reserve money (percent change)

17.1 11.3 15.8 12.9 9.9 10 13.9

Private credit (percent change)

4 7.5 -0.6 11 5.6 9.8 10.7

Six-month treasury bill rate (period average, in percent)

13.3 12.3 9.8 9.7 8.8 - -
               

External sector

             

Merchandise exports, U.S. dollars (percentage change)

28.9 -2.6 0.4 1.1 -3.9 0.7 -4

Merchandise imports, U.S. dollars (percentage change)

14.9 12.8 -0.6 3.8 -0.9 -0.2 -1.9

Current account balance (in percent of GDP)

0.1 -2.1 -1.1 -1.3 -1 -0.5 -0.9
               
(In percent of exports of goods and services, unless otherwise indicated)              

External public and publicly guaranteed debt

153.4 160.3 144.6 166.6 164.5 168.2 188.7

Debt service

13.4 16.2 21.6 23.5 21.9 22.5 24.9
               

Gross reserves (in millions of U.S. dollars) 5/

14,784 10,799 6,008 9,096 13,534 17,131 17,666

In months of next year's imports of goods and services

3.6 2.7 1.5 2.2 3.4 4 4.3
               

Memorandum items:

             

Real effective exchange rate (annual average, percentage change)

6.1 3 -1.3 0.9 10.9 - -

Terms of trade (percentage change)

7.3 -10 -1.9 0.3 5.1 3.8 14.5

Real per capita GDP (percentage change)

1.5 1.7 1.6 2 2.2 2.5 2.5

GDP at market prices (in billions of Pakistani rupees)

18,276 20,047 22,379 25,068 27,384 30,170 29,907

GDP at market prices (in billions of U.S. dollars)

213.6 224.4 231.1 243.4 267.5 - -
               
 

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections.

1/ Fiscal year ends June 30.

2/ Inflation after 2009/10 based on new CPI weights, recalculated in September 2011.

3/ Including changes in inventories. Investment data recorded by the Pakistan Bureau of Statistics are said to underreport true activity.

4/ Excludes obligations to the IMF except budget financing military debt commercial loans and short-term debt.

5/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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