* IMF assessment recommends elimination of electricity subsidies, removal of taxes exemptions and stepping up privatisation
By Khalid Hasan
WASHINGTON: An International Monetary Fund (IMF) staff assessment of Pakistan’s macroeconomic situation has called it fragile and vulnerable to a crisis.
The outlook for 2008-09 will depend critically on steadfast policy implementation and the availability of the substantial external financing. The government needs to implement quickly and decisively the policies it has outlined in order to restore macroeconomic stability. According to the IMF experts responsible for the assessment, the external current account deficit for 2008-09 will be $14 billion or 7.7 percent of the gross domestic product (GDP). With capital inflows of about $7 billion, the IMF estimates the external financing gap to be around $7 billion.
Real GDP growth is expected to slow further to about 4.5 to 5 percent in 2008-09, while average inflation is projected to increase to 16-17 percent owing in part to the expected pass-through of higher international food and energy prices.
Subsidies: The IMF recommends that the fiscal deficit should be reduced to 4.7 percent of the GDP and electricity subsidies should be eliminated.
Tax: A stronger effort is necessary to broaden the tax base by eliminating some tax exemptions. Interest rates should be allowed to rise as needed in order to lower inflation and ensure that the domestic financing of the deficit is covered entirely by commercial banks and non-bank sources.
There is urgent need to fill the financing gap for 2008-09 and strengthen reserves, a task that will prove to be challenging. IMF notes that Pakistan has requested an oil facility from Saudi Arabia to defer the payment of oil imports of 110,000 barrels per day, which at current oil prices would amount to $5 billion annually. The timings and terms of this facility were on hold till the presidential election. Pakistan will also need additional external borrowing from international financial institutions as well as bilateral sources.
Privatisation: Privatisation, which has been dormant since the Pakistan Steel Mill sale was blocked by the Supreme Court in 2006, will have to be stepped up.
The IMF believes that Pakistan needs to broaden the base of the general sales tax to include services. It should also tax commercial agriculture under income tax, eliminate tax exemptions and strengthen tax enforcement.
IMF experts note that real GDP growth has slowed to 5.8 percent from 7 percent in 2006-07. Core inflation, excluding energy and food, increased to 14.7 percent. The rupee has depreciated by 22 percent against the dollar since the end of June 2007. The external current account deficit widened to about $14 billion or 8.5 percent of the GDP in 2007-08.
Export growth recovered to reach 16.5 percent, as against 4.5 percent in 2006-07, and workers’ remittances and other current transfers performed strongly to reach $11.1 billion, but total imports grew by more than 30 percent owing to an increase of $4 billion in the value of oil imports and strong aggregate demand growth.
The fiscal deficit is estimated to have risen to 7.4 percent of GDP in 2007-08 from 3.7 percent in 2006-07, mainly because of a substantial increase in food and energy subsidies higher interest payments on National Savings Certificates. This deficit was largely covered through State Bank of Pakistan financing.
An IMF and World Bank team will visit Pakistan in the next few days to conduct an updated assessment of the financial sector.
Source: Daily Times, 7th September, 2008