Economy getting back on track: IMF

Reuters May 25, 2010

ISLAMABAD: Pakistan’s economy is getting back on track after a balance of payments crisis 18 months ago but it still remains vulnerable to shocks and a risky market for investors, the IMF’s representative said on Tuesday.

Political uncertainty, chronic insecurity and a budget deficit inflated by spending to tackle a militant insurgency are all threats to recovery but the outlook is far brighter than when Pakistan was on the brink of default in 2008. “In terms of the economy, stabilisation seems to be taking hold ... progress has been made,” Paul Ross of the International Monetary Fund (IMF) said in an interview in Islamabad. Pakistan turned to the IMF for an emergency package of loans in November 2008, when inflation was 25 per cent, central bank reserves were the equivalent of just one month of imports and the current account deficit had widened to 8.5 per cent of gross domestic product for the fiscal year 2007.

Now, inflation has dropped to 13 per cent, reserves are four months of imports and the current account deficit is set to be around 2-3 per cent of the GDP this fiscal year ending June 30. Even among risky “frontier markets” Pakistan is seen as too long a shot for many investors due to its insecurity, poor governance, corruption and crippling power shortages. Foreign direct investment (FDI) has almost halved over the past year, standing at just $1.77 billion in the first 10 months of the fiscal 2010.

In Vietnam, by comparison, the government expects FDI of $10-11 billion in 2010. However, there has been an upturn in foreign portfolio investment as the economy has improved, with net inflows into the stock market of $508.7 million in the first 10 months compared with an outflow of $392 million in the year-earlier period.


Ross pointed to a narrowing of the spread on Pakistan’s sovereign CDS, used to insure against sovereign debt default, as a signal of returning confidence in the economy. The five-year credit default swap (CDS) spread started to drop steadily at the end of February from levels above 900 basis points.

It dropped as low as 675 this month before rising again in line with global trends as Eurozone tremors spooked markets. It was at 750 on Tuesday. “The security situation adds to uncertainty, which investors don’t like, but if the economic stability deepens further I would expect CDS spreads to come down some more,” Ross said. The IMF agreed this month to release a fifth tranche of the $11 billion loan agreed in 2008 after Pakistan sought a waiver on some of its targets, including for the budget deficit, which the government has targeted at 5.1 per cent of GDP for fiscal year 2010.

The government’s initial forecast for the budget deficit was 4.9 per cent of GDP for fiscal year 2010. The government, which will unveil its budget for fiscal year 2011 on June 5, is now expecting GDP growth of 4.5 per cent for the next fiscal year starting July 1. The government is expecting 4.1 per cent GDP growth for fiscal year 2010. However, Ross said a rise to the Asia emerging markets growth rate of 8 per cent will require a leap in the tax-to-revenue rate, which is just 9 per cent of GDP.

Plans for a Value Added Tax face significant opposition and there are currently fewer than two million taxpayers from a population of 170 million. This leaves no domestic cushion for the government in the case of an economic shock, constantly forcing it to look externally for assistance and it limits the resources available for investment in health, education and infrastructure.

Published in the Express Tribune, May 26th, 2010


Meekal Ahmed | 13 years ago | Reply Sorry to butt in here again. The only thing people sense as progress is less inflation. They don't care about our twin deficits being reduced and our rising foreign exchange reserves or whether there has been more or less foreign portfolio investment. Growth is good but only if it is employment-intensive and creates jobs and reduces poverty. In this context I must express my shock of news (if correct) that next year's inflation target is 9%. This is too high. It is also callous and indefensible. Opinion Polls people put inflation concerns ahead of terrorism. But people, the press, the TV, the talking-heads need to rise up against this corrosive menace. If you don't speak up and revolt, the government will carry on in its same old merry way oblivious to the suffering they are inflicting on the poor and vulnerable by imposing on them the cruelest tax of all -- inflation. Finally, let me say that I am disappointed in this paper too for not having come out and put this issue as the the biggest challenge facing the economy. There have been many worthy Editorials about this and that but I have yet to read one which talks of this subject. It should not be mentioned once, as if in passing and an after-thought to placate people like me, but over and over again. I have been called an "inflation hawk". I accept that title even if it seems to mock me for standing up for something which is perceived to be "unrealistic". But there remains a tinge of helplessness in my heart since there is nothing I can do about it except write. I thought the pen was mightier than the sword? What happened?
Meekal Ahmed | 13 years ago | Reply Actually the 2 million (direct) tax payers is a slight misnomer. If you include the people who pay tax (forcibly) through the witholding system, the figure jumps to about 40 million. But the point is nevertheless well taken. A tax-GDP ratio of below 9% is not going to get us anywhere. It is amongst the lowest in the world and we are all well aware of widespread corruption and abuse in the tax system. For 62 years, our tax collecting agency has defied all attempts to reform it. Arguably the system is worse today than it was say two decades ago. Whether the VAT is the silver bullet I do not know. What I do know is that every effort will be made to sabotage it (just as the GST has been) and once the fund program is over it will be withdrawn.
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