IMF warns of serious risks to economy KHALEEQ KIANI Share Email 0 Comment(s) Print Published 2013-09-13 07:25:22 ISLAMABAD, Sept 12: The International Monetary Fund has warned of more than a dozen serious risks to Pakistan’s economy, including uncertainties arising out of superior judiciary’s intervention in economic and administrative issues and a weak support from three smaller provinces to political and economic decision making. “Over the medium term, Pakistan’s economy will continue to under-perform and vulnerabilities will remain high unless comprehensive reforms are implemented,” said the IMF in its assessment of the country’s economic situation and recent reform measures following conclusion of $6.68 billion bailout package. It said the IMF programme implementation risks were high given Pakistan’s track record, particularly political constraints and the limited technical capacity to implement reforms simultaneously across a wide range of activities. The fund, however, appreciated that the risks could be mitigated by critical upfront actions as well as the strong electoral mandate and the government’s commitment to reform and called for strong international technical support to help ease risks posed by weak technical capacity. “The recent record of interventions by the Supreme Court in economic and administrative issues may be another source of uncertainty,” said the IMF. It noted that the governing party might lack political support in provinces other than Punjab, complicating provincial-federal financial agreements. It said Pakistan also faced significant insurgency problems in the regions bordering Afghanistan “which could intensify with the drawdown of Nato forces there”. Sectarian violence in Balochistan and other provinces is another source of unrest, and street crimes in Karachi adds to security concerns. It said the vulnerability to oil price shocks had risen. While oil imports declined from 33 per cent of imports in 2001 to about 16pc in 2004, they have risen each year since and oil vulnerability index has risen. Pakistan, it said, was also vulnerable to inward remittance spillover. While a decline in oil prices would lower import pressure, there might be adverse indirect effects on reduced remittances from workers in oil-exporting countries (60pc of Pakistan’s remittances come from the Middle East). “Delays or shortfalls in financing from public or private sources are another programme risk.” Public funding risks should be eased by strong commitments of support from the World Bank, Asian Development Bank and key bilateral partners while private financing risks could be reduced by government’s strong privatisation programme, the IMF said. “Low and declining SBP reserves leave the country to a balance of payments crisis from even relatively minor external or domestic shocks. Domestic risks also emanate form the fiscal imbalance with the attendant high government debt rollover requirements of about 30pc of GDP a year, severe energy crisis and security risks.” On the fiscal side, it said, the baseline scenario projected continued weak revenue collection and high energy subsidies would generate a budget deficit of around 8.5pc of GDP, although lowered to 6.5pc because of new reforms. With continued monetisation of fiscal deficits and further depreciation of the rupee, inflation would likely increase in the coming months and return to double digits, the IMF noted. The current account deficit is projected to be around 1pc of GDP by end-June 2014, but baseline of payments is expected to remain under pressure given weak export growth and net capital inflows, with reserves declining to $3.5bn by end-June 2014. “With low savings and investment, high fiscal deficits, weak private credit, unresolved energy problems, core inflation in double digits and ongoing security problems, baseline real GDP is likely to remain around 3pc with considerable potential volatility,” said the IMF. Credit to the private sector would continue to be crowded out, contributing to depressed private investment. Moreover, a further global economic decline could also impair Pakistan’s exports. A further downturn in Europe could have negative effects, as one fourth of exports go to Europe and most non-Middle East remittances come from Europe. Slow growth in emerging markets could add to external risks. The financial sector is currently stable but remains vulnerable to deterioration in the overall macroeconomic environment. The balance sheets of commercial banks are highly exposed to government securities, so a fiscal crisis could have a large impact.
Posted on: Fri, 13 Sep 2013 18:14:34 +0000
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