Doomsday scenario: IMF paints a gloomy picture of Pakistan’s economy

Jeffrey Franks says the economy is in dire straits and that a bailout programme is inevitable.

ISLAMABAD:

The International Monetary Fund (IMF) may sign a loan programme with the caretaker government if all major political parties agree on a broader set of action plans. However, before that is possible, Pakistan will have to take some tough prior actions, says the Fund’s representative for the region.

In a luncheon meeting with a group of journalists here on Friday, Jeffrey Franks, adviser to the IMF for the Middle East and Central Asia, spoke at length on the grave economic situation the country is faced with. He also shed light on the Fund’s ongoing dialogue with the government, aimed at building consensus on a set of conditions needed to be fulfilled before and during the course of a fresh bailout programme. Franks was accompanied by the new IMF Country Representative Mansoor Dailami.

“The current polices will have to be readjusted in order [for Pakistan to become eligible] for an IMF programme. The IMF has discussed with the government what kind of policies would be necessary,” said Franks.



The IMF’s prescription to Pakistan includes a healthy measure of – not surprisingly – increasing taxes, cutting expenditures, withdrawing electricity subsidies and increasing interest rates to check inflation, which is expected to rebound soon and devalue the currency further.

“We have agreed with the government that the deficit eventually needs to come down to 3-3.5% of the GDP in three years, from the current level of over 7%,” revealed Franks. “According to our one-month assessment, Pakistan’s currency is overvalued by 5-10%. Modest depreciation might yield positive results for the economy,” he added. “The monetary policy also needs to be calibrated to bring down inflation to between 5-7%.”

He underscored the need for having “broadest and deepest possible political support for any new programme”. Franks also sought support at the highest levels, besides taking provinces on board, before the government enters into a formal arrangement with the Fund. He said that if political parties agree on a broader reforms agenda, the IMF can be flexible on how Pakistan goes about achieving it.



“The decision whether or not we will enter into a programme with the interim government will be made by the IMF management: however, if there is very strong and broad political support, going beyond the interim government, it might be possible,” Franks said, while responding to a question asking about the timing of the programme.

The IMF official observed that Pakistan’s problems require long-term solutions, and that any new programme will not last less than three years.

Franks disclosed that, according to the IMF assessment, this year’s budget deficit will remain around 7-7.5% of the GDP. In absolute terms, the IMF projects a Rs1.624 trillion deficit – a whopping Rs516 billion or 2.3% higher than government estimates. Besides the significant shortfall in revenues, Pakistan also may not be able to complete the auction of the 3G telecom spectrum, causing another shortfall of around Rs75 billion.

To add icing to that unsavoury cake, the economy will grow just 3.5% this year according to the IMF’s estimates, as against official projections of 4.3%.

“The number one bottleneck to growth is the energy sector. The number two bottleneck is the energy sector, and the number three
bottleneck is also probably the energy sector,” said Franks.

“Private sector credit growth is very weak; large scale manufacturing is positive, but very low; and we don’t see robust export growth,” observed Franks. He further said that while declining inflation is a good indicator, it is also worrisome because domestic demand continues to remain weak. He also criticised the government’s tax collection efforts, which he said are indicative of weaknesses in the economy.

Even though the IMF has projected a current account deficit of a low 0.7% of GDP, Franks warned that even this low level is dangerous due to drying foreign inflows. As a final blow, he also ruled out any restructuring of IMF loans.

He agreed that tough actions may cause a temporary drop in growth, but insisted that they were necessary for achieving macroeconomic stability.

Franks also hinted that the central bank should be made an independent part of plans for the new programme.

Published in The Express Tribune, January 19^th, 2013.

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