Pakistan’s efforts to strengthen economic resilience lauded by IMF

The International Monetary Fund (IMF) has welcomed Pakistan’s recent policy measures aimed at strengthening economic resilience.

The IMF in a statement stated that its Executive Board concluded the 2021 article IV consultation and the sixth review of the extended arrangement under the Extended Fund Facility (EFF) for Pakistan.

The completion of the review allows the authorities to draw the equivalent of SDR 750 million (about $1 billion), bringing total purchases for budget support under the program to SDR 2,144 million (about $3 billion).

The program aims to support Pakistan’s policies to help the economic recovery from the Covid-19 pandemic, ensure macroeconomic as well as debt sustainability and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Pakistan entered the Covid-19 pandemic with strengthened buffers, following the approved EFF program. A strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock. 

At the same time, external pressures also started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures.

The recent policy adjustments were appropriate to address these challenges and maintain economic stability. The economy is set to continue recovering in FY2022, with real Gross Domestic Product (GDP) growth projected at 4 per cent, while inflation is expected to pick up this year before gradually slowing down.

However, according to the IMF Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms. 

Strengthening the medium-term outlook hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy.

To this end, increased focus is needed on measures to strengthen economic productivity, investment and private sector development, as well as to address the challenges posed by climate change.

Following the Executive Board’s discussion on Pakistan, Deputy Managing Director Antoinette Sayeh said:

“The Pakistani economy has continued to recover despite the challenges from the COVID-19 pandemic, but imbalances have widened and risks remain elevated. The authorities’ recent policy efforts to strengthen economic resilience are welcomed but timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth.

“The authorities have taken important measures to strengthen fiscal policy and put public finances on a sounder footing. Along with careful spending management, revenue mobilization will help to create space for much-needed spending on infrastructure and social protection, while improving debt sustainability.

Maintaining the momentum on the reform of personal income taxation and harmonization of general sales taxes is essential. Broader reforms in tax administration and public financial and debt management are expected to further improve the fiscal framework.”

The IMF deputy managing director further welcomed the amendments to the central bank act. 

“The adoption of amendments to the central bank act is a welcome step toward strengthening its independence to pursue its mandates of price and financial stability. The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy would help to anchor inflation.”

“Closer oversight of financial institutions to ensure they remain well capitalized would help to maintain financial stability. Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild reserves. The authorities are committed to removing the existing exchange restrictions and multiple currency practices when BOP conditions stabilize,” he said.