ISLAMABAD (May 29 2009): The global financial crisis and recession pose risk to Pakistan’s economy with it growth, exports, remittances and capital inflow could decline further in the next fiscal year, according to the International Monetary Fund “Regional Economic Outlook: Middle East and Central Asia,” released here on Thursday.
The Outlook said that a prolonged economic slowdown in oil exporting countries could translate into lower growth in neighbouring trade partners including Pakistan by declining exports, private capital inflows, workers remittances and Foreign Direct Investment. The ultimate outcome could be increase in poverty, said Paul Ross, resident representative of the IMF at a media briefing about the finding of the Outlook.
He said that the policy priorities of Pakistan should be of consolidating macroeconomic stability and ensuring protection of vulnerable groups. The relaxation in fiscal deficit target by the IMF for next fiscal year, increase from 3.4 percent to 4.6 percent of the GDP, would provide space to Pakistan for additional social spending. Replying to questions about high inflation in Pakistan, Ross said decline in inflation was slower than the IMF anticipation. He said that the IMF was discussing growth and inflation projections with Pakistan for the next fiscal, which would be finalised in June-July.
He said Pakistan has requested to the IMF for additional assistance but the request is still under consideration, however to a question about the release of next tranche, he said it would be released in July.
Ross said high inflation was a big concern for the IMF which could be reduced by taking measures in both the fiscal and monetary policies. To a question whether the IMF would allow Pakistan to use the 7.6 billion dollars standby arrangement for budget support if the pledges made at the Friends of Pakistan did not materialise, he said a decision to this effect could only be taken at that time. He said a substantial decline was anticipated in the private capital inflows which are expected to go down from $5.1 billion in 2008 to $3.1 billion in 2009. He said that it was not possible for the government to reduce current expenditures in many areas but the subsidies are being reduced as these were not targeted to the poor. Both the rich and poor have been benefiting from these subsidies.
The IMF was bit optimistic about Pakistan’s real GDP growth as its projection is 3.5 percent for 2009-10 compared to the 3.3 percent government forecast. The nominal GDP projection for the next fiscal year is $170.2 billion, CPI is 7.5 percent and broad money growth is 7.5 percent. The total revenue is estimated at 15.2 percent of the GDP and total expenditure and net lending at 19.6 percent for the next fiscal year.
The total debt of the government is projected at 56.9 percent of the GDP whereas total gross external debt of the country will increase from 26.5 percent to 31.9 percent of the GDP in the next fiscal year. The current account deficit is projected to be at $8.3 billion that is about 4.9 percent of the GDP for the next fiscal year. Ross said that in countries with more limited fiscal space, expenditure prioritisation will be necessary to maintain fiscal sustainability, especially if oil prices remain at their current levels for a prolonged period.
A few countries have taken measures to consolidate their fiscal positions and are planning to significantly reduce expenditures to preserve fiscal sustainability. About Pakistan, he said it would be difficult for the country to cut current expenditure in many areas but certainly subsidies are going to be reduced as these were not targeted. Both the poor and rich have been equally enjoying the facility. Acceding to the REO, Pakistan and other Middle East Oil Importers (MEOs) have generally escaped the ravages of global financial crisis because of relatively limited links to global financial markets.
As the global recession deepens, however, MEOIs would face weaker prospects for exports, foreign direct investment (FDI), tourism and remittances. Consequently, MEOI growth is slowing too, but with a lag and more moderately than in advanced economies, and financial sectors in MEOIs are becoming more vulnerable.
Most governments are unable to respond with significant fiscal stimulus owing to the limited fiscal space available. As a result, unemployment and poverty could rise substantially – with adverse implications for social stability. Therefore, in low-income countries, an increase in donor financing will be necessary to maintain aggregate demand and enhance social safety nets.