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Pakistan in a difficult situation: IMF official
Publication Date : 09-09-2013
IMF’s Mission Chief for Pakistan Jeffrey Franks says that the IMF has anticipated that Pakistan’s economy would grow to the vicinity of 5 per cent by the end of just approved economic programme in the fiscal year of 2015-16.
In an interview published in the IMF Survey, Franks said all reforms anticipated in the economic programme submitted by Pakistan are going to take time.
“Growth may actually slip a little bit in the first year of the programme (2013-14) because of necessary fiscal adjustment,” he said.
Franks said Pakistan is in a difficult economic situation right now; foreign exchange reserves are falling, chronic fiscal deficit is widening and in addition high inflation and major structural impediments have stalled economic growth.
However, Pakistan is not yet in an economic crisis, but to avoid a full-blown crisis and a collapse of the currency, the government decided to seek financial assistance from the IMF, he pointed out.
The Pakistan programme envisages a substantial decline in the budget deficit of the government from nearly 8.5 per cent of
GDP last year to 5.8 per cent of GDP in 2013-14 and to 3.5 per cent of GDP by the end of the programme in 2015-16.
“To achieve this, the authorities will substantially reduce tax loopholes and exemptions, broaden the tax base, and reduce tax evasion,” mission chief said.
The programme will require some tightening on both the fiscal and monetary sides to put the fiscal position on a sustainable path and reduce inflation, according to Franks.
Explaining the main policy components of the economic programme and how it would help Pakistan, Franks stated that the financial support from the IMF and other international partners would help Pakistan overcome the balance of payments difficulties by stabilising foreign exchange reserves and relieving pressure on the currency.
“Beyond macroeconomic stabilisation, the programme includes substantial structural reforms that will help boost the long-term growth potential of the economy,” he said.
The most important of these is tackling the current energy crisis, which is substantial drag on economic growth. Referring to government’s energy policy, he said the idea is to encourage more efficient consumption and better use of energy resources by reducing energy subsidies that currently go mainly to the rich.
“It is true that most people will pay more for energy, but they will get energy more reliably and more consistent than they do now. There will still be a subsidy for the poorest consumers.”
All of those measures while they might not completely eliminate the massive blackouts that Pakistan is currently experiencing will substantially reduce them over the duration of the programme, mission chief Jeffrey Franks said.
On the macro-economic side, he said “we should not forget that high budget deficits have been absorbing a disproportionate amount of the credit in the economy.”
This means that private businesses have not been able to borrow money to grow.
In fact, private sector credit has declined in real terms in the last two years in Pakistan. Thus, reducing the deficit will free up financial resources so the private sector can get the credit necessary to grow and create jobs, he explained.
In response to a question whether the programme can help create more jobs over time, the mission chief said that creating more jobs would require achieving higher rates of economic growth.
IMF thinks that restoring macroeconomic stabilization and alleviating some of the bottlenecks and inefficiencies in the economy would help boost growth and job creation, he said.
“We think that by enhancing the business environment and reforming the financial sector, there will be a recovery of foreign direct investment into Pakistan, which will be another source of job creation,” he said.
On the question as to how the programme will help protect poor, Franks disclosed that IMF has agreed with the government on a significant boost of targeted income support programmes which would help the vulnerable groups, even with the reduction of untargeted subsidies.
The number of families cover by the programme will increase and the amount those families receive will grow. There will also be a new component of income support for poor families conditional on school attendance, he said.
The mission chief stated that the programme will also address reforms in trade policy, the financial sector, as well as those to improve the business climate.
The government has also announced the privatisation of some state-owned enterprises, with the aim of increasing economic efficiency and hence boosting growth, he said.