Pakistan has told the International Monetary Fund (IMF) that its current account deficit may remain below $4.5 billion on the back of lower-than-projected imports – an assertion, if accepted, can significantly lessen Islamabad’s external financing woes for this fiscal year.
Despite a reduction in imports and other compression measures, Pakistani authorities briefed the IMF that they would be able to achieve economic growth in the range of 3% to 3.5%, sources told The Express Tribune. Inflation would remain around the official target of 21%, they added.
The exchanges have taken place as part of ongoing talks under the first review of the $3 billion standby arrangement.
The Ministry of Finance informed the lender that based on results of the first quarter and compressed imports, the current account deficit may remain in the range of $4 billion to $4.5 billion during the current fiscal year. It was only $927 million during the July-September quarter.
At the time of budget announcement, the government had projected a deficit of $6.5 billion, which was in line with the IMF’s July assessment. A reduction of at least $2 billion will significantly lessen the external financing gap, provided the IMF also endorses the fresh assessment.
It is not clear whether the State Bank of Pakistan has also cut its current account deficit forecast.
The expected $2 billion reduction in the current account deficit is more than the $1.5 billion the government is struggling to raise through Eurobonds. Pakistan has told the IMF that it is facing difficulties in arranging external financing of around $6.5 billion during the current fiscal year.
Sources said that the assessment was based on the assumption that the country would achieve the current year’s export target of $30 billion. During the first four months (Jul-Oct), exports amounted to only $9.6 billion, up 0.7%.
The catch was imports, which the Ministry of Finance projected at over $54 billion for the current fiscal year, which was lower than last year’s level. The new projection is $10.4 billion less than the figure the IMF used in its July report.
Imports during the first four months stood at $17 billion, down 18.5% compared to last year. Sources said that the government also expected remittances to cross $30 billion in the current fiscal year, although during the first three months, the inflows shrank one-fifth.
Read Current account in deficit again
While the decrease in imports will lower the external borrowing requirement, it will dent the Federal Board of Revenue’s (FBR) tax receipts that are projected on the basis of over $60 billion in imports.
External financing and the high debt servicing cost remain the two weaker areas in the ongoing Pakistan-IMF talks for the second loan tranche of $710 million.
The government apprised the IMF that economic growth may remain in the range of 3% to 3.5%, an assessment that was better than the projections of the central bank and the IMF.
The ministry sees a rise in economic growth to 5.5% in the medium term but challenges remain.
During the last fiscal year, the economy grew 0.3%, an official claim that neither the IMF nor the World Bank has accepted so far. The IMF was briefed that the government was going to review last year’s provisional economic growth rate of 0.3% by the end of November, which would also coincide with the release of first-quarter economic growth figures.
The economy is expected to get a boost from the improved output of crops, mainly rice and cotton. The achievement of 3.5% growth target is subject to a stable external and domestic environment.
Pakistan’s fiscal situation remained better during the first three months of the current fiscal year but it was still vulnerable due to the growing debt servicing cost. Sources said that inflationary pressures still remained high, although the authorities were hopeful of achieving the annual target of 21%.
They said that the IMF was told that due to better supplies, stronger rupee during the first quarter and consequent actions to reduce prices in markets, the inflation rate would remain in the range of 20% to 22%.
The central bank’s assessment was also in line with the Ministry of Finance’s new figures. The IMF in July projected the inflation rate at 25.9% for the current fiscal year.
During the first four months, the inflation decelerated to 28.6%, which according to the Ministry of Finance would further slow down in the second half.
For the next fiscal year, the ministry has projected inflation in the range of 7% to 8%.
Sources said that the IMF would share its assessment on the gross domestic product (GDP) growth, current account deficit and inflation in the next few days.
Published in The Express Tribune, November 7th, 2023.
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