Pakistan’s growth to reach 5pc in medium term with sustained reforms, financial support: IMF

The International Monetary Fund (IMF) has predicted that Pakistan’s growth is expected to gradually return to a potential five per cent in the medium term “assuming sustained policy and reform implementation and adequate financial support”.

Last week, the global lender’s executive board had green-lit a $3 billion nine-month standby arrangement (SBA) for Pakistan in order “to support the authorities’ economic stabilisation programme”.

The board had approved the bailout package for the country for an amount of $2.25bn Special Drawing Rights (SDRs) — reserve funds that the institution credits to the accounts of its member nations — the IMF had said in a statement, adding that this amounted to about $3bn, or 111pc of Pakistan’s quota.

According to a 120-page country report released on Tuesday which analysed the country’s macroeconomic outlook, the IMF said: “Assuming sustained policy and reform implementation and adequate financial support from multilateral and bilateral partners, growth is expected to gradually return to its potential, 5pc, over the medium term.”

The report added that growth was likely to “pick up moderately” in the current fiscal year and reach 2.5pc.

The IMF noted that although base effects from post-flood recovery would provide a boost, especially to the agriculture and textile sector, “unwinding of the tight management of imports will take time to percolate through the economy … and continuing external challenges and the need for tight macro policies will limit the recovery.”

On the inflation outlook, the IMF said headline inflation was expected to remain lower from June onwards due to the base effects from last year’s increase in fuel and electricity prices and diminished contributions from food items.

“Price pressures are projected to remain elevated, including as a result of the much-delayed monetary tightening, thus average headline inflation is expected to remain above 25pc in FY24, with end-of-period (eop) inflation falling below 20pc only in FY24Q4.

“Likewise, core inflation is set to recede only very gradually in FY24 on account of elevated inflation expectations and the necessary tightening of policies operating with a lag,” the IMF pointed out.

However, it said the deceleration of headline inflation was set to continue in the next fiscal year and eop inflation would fall to the single digits only in the middle of the fiscal year 2025-26.

Regarding the fiscal outlook, the Fund observed that the fiscal space has been “severely depleted and substantial vulnerabilities remain”.

It recommends that small primary surpluses should be maintained in the coming years, with strong revenue efforts to create space for priority social and development spending and to strengthen debt sustainability.

It pointed out that without such efforts, the fiscal and debt position will “remain fragile and could undermine macroeconomic stability”.

Meanwhile, the lender said it saw the current account deficit (CAD) increasing to around $6.5bn in the current fiscal year with the recovery in exports and imports.

It noted that the CAD would have to “remain moderate at around 2pc of GDP over the medium term, commensurate with projected official and capital flows and efforts to rebuild reserves”.

The IMF also said that risks to debt sustainability had become “more acute” due to the scarcity of external financing and the large gross financing needs that would persist over the coming years, further narrowing the path to sustainability.

More to follow.