News Desk |
The International Monetary Fund (IMF) has blamed the Pakistan Tehreeke-e-Insaf (PTI) government for delayed and unsatisfactory policy action for the improvement of the economic conditions.
In its staff-level report after its Executive Board approved the $6 billion bailout package to help Pakistan meet its international debt obligations, the IMF has said that despite some exchange rate depreciation and significant monetary policy tightening, sizeable foreign exchange interventions continued through April 2019.
“Similarly, fiscal slippages in the first half of the fiscal year have been significant despite the adoption of two budget amendments. Finally, increases in power and gas tariffs have not been sufficient to stem the accumulation of quasi-fiscal losses,” Dawn has quoted IMF as saying in the report.
The IMF has said that Pakistan’s capacity to repay its Fund obligations in a timely manner were adequate but were subject to “higher than usual risks”.
The Fund has also pointed out that sizable short-term financing from bilateral creditors provided critical financing relief, but “also deferred the urgency to tackle the underlying problems while increasing the maturing debt obligations due in coming years”.
Despite passing two supplementary budgets, the IMF said, fiscal imbalances have continued to build. In addition, it said, the overall fiscal deficit (excluding grants) widened to over 7 percent of GDP against the budgeted target of 5.1 percent.
“This deterioration is largely driven by a significant revenue shortfall, equivalent to 1.4 percent of GDP relative to the budget target,” the Fund noted.
Resultantly, the IMF stated, economic activity has considerably slowed down and inflation accelerated because of the weakening confidence. While pointing out the high-frequency indicators, the statement has said that the large-scale manufacturing index, domestic cement dispatches, and motor vehicle sales have continued to deteriorate and confirmed a marked slowdown in economic activity.
Is Pakistan’s Capacity to Repay IMF Adequate?
The IMF has said that Pakistan’s capacity to repay its Fund obligations in a timely manner were adequate but were subject to “higher than usual risks”. It has noted that despite the safeguards included in the design and financing of the program, the risks to the program were “particularly high”.
While admitting that the authorities were committed to carrying out the new program, but the outlook was subject to considerable risks due to domestic policy implementation and external events.
While expressing concerns over the continued decline in reserves and a delay in the adoption of adjustment policies, the IMF noted, risks to Pakistan’s repayment have increased. “Adequate capacity to repay and debt sustainability will depend on strong policy implementation and adequate execution of the existing financing commitments,” it said.
A potential blacklisting by the Financial Action Task Force could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the program.
The IMF considers that managing successfully the transition to a market-determined exchange rate instead of the rate determined by the central bank will be crucial. It has warned that the failure to maintain an adequately tight monetary policy could lead to exchange rate overshooting and second-round effects on inflation.
IMF has further stated that the financial slippages and resistance to some of the fiscal measures could undermine the program’s fiscal consolidation strategy and put debt sustainability at risk. “Progress in governance and institutional building may be opposed by vested interests, weakening structural reforms and medium-term growth prospects,” it said.
Will Provinces Fully Deliver?
Moreover, the absence of the ruling party’s majority in the upper house of parliament may hinder the adoption of legislation needed to achieve program objectives. Also, there is a risk that provinces may under-deliver on their commitments to budget parameters.
FATF’s Blacklisting can Freeze Capital Inflows to Pakistan: IMF
Finally, a potential blacklisting by the Financial Action Task Force could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the program.
Other risks, including those related to domestic security conditions, global trade, growth in major trading partners, oil prices and tighter global financial conditions, could exacerbate these challenges.