Political uncertainty threatens economy: IMF


The International Monetary Fund (IMF) expressed concern on Friday about the delayed reforms by the government, stating that political instability and rising social discord in a complex political landscape could disrupt the implementation of crucial economic stabilization measures.

In its latest assessment report concerning the outcomes of the $3 billion Stand-by Arrangement (SBA) with Pakistan, the IMF acknowledged Pakistan’s satisfactory progress in meeting key objectives while simultaneously emphasizing the country’s risk exposure due to political unrest and the need for unprecedented external financing levels.

“The outlook is laced with high levels of uncertainty. The recent government has vowed to uphold the SBA’s initiatives, yet political instability is a persistent issue,” the IMF reported.

The report further warned, “A re-emergence of social unrest due to the intricate political environment and rising living costs could hinder the implementation of policies and reforms.”

The IMF indicated that although Pakistan has met many immediate objectives, the nation continues to face daunting challenges that will demand consistent attention for successful resolution.

According to the IMF, Pakistan’s financial and international vulnerabilities are cause for concern, including issues of debt stability and the risks associated with refinancing. The IMF emphasized the importance of strong policy adherence to assure the restoration of external viability and to ensure the country’s ability to settle its debts with the Fund.

The IMF also pointed out the dangers Pakistan faces, such as concentrated credit risk, repayment capability, image concerns, societal-political strains, and security issues.

It was clarified that Pakistan has substantial gross debt-service commitments, and that current account imbalances, caused in part by limited exchange rate adaptability and import constraints, may necessitate further policy adjustments to achieve external balance.

Reform Delays

The IMF noted, “Some reform processes initiated by the interim administration have been postponed, necessitating a stepped-up effort to hasten their implementation.”

Also see: IMF Recommends Rs163 Billion Spending Reduction Amid Revenue Shortfall

The planned introduction of a system to register retailers for tax filing and enforcement obligations has been deferred beyond the original January 1, 2024, target.

The Federal Board of Revenue (FBR) had successfully registered 637 retailers by May 8, a slight increase from 75 registrations by the end of April.

The transformation of the FBR into a semi-autonomous body has been put on hold, pending consultancy aid for final reform steps, the IMF explained.

The Pakistani government has engaged the consultancy services of Mackenzie for three years, at a cost of over $4.2 million, which will be covered by the Bill and Melinda Gates Foundation, according to a senior FBR official.

Debt Concerns

The global lender hints that debt sustainability remains a sensitive issue, emphasizing that any deviation from policy, coupled with diminished external funding, could strain the fragile path to debt sustainability and pressure the currency exchange rate.

The IMF identified that debt sustainability risks are severe given the enormous financing needs and the ongoing challenges connected to securing external funding. The report suggests that real interest rates will likely become increasingly detrimental to debt dynamics in years to come.

Even with the IMF’s support, the gross reserves hover around $8 billion. The IMF acknowledged the central bank’s efforts in foreign currency acquisitions to offset ongoing debt servicing.

The Express Tribune previously reported that the central bank had acquired between $5 billion to $5.5 billion from the open market until the previous month.

The IMF has adjusted Pakistan’s projected current account deficit to $3 billion for the current fiscal year—a figure notably lower than their original forecast at the commencement of the last program.

Pakistani officials have criticized the IMF’s overestimation of the current account deficit, arguing that it places undue stress on the country to seek additional foreign loans. Current Deputy Prime Minister Ishaq Dar has historically challenged the IMF’s inflated projections of the deficit. An anonymous official urged the IMF management to consider the miscalculations that have exceeded expectations by more than 100%.

However, the IMF argues that without importing restrictions, the current account deficit would have expanded, demanding further depreciation of the real exchange rate for a restoration of equilibrium.

The institution also highlighted the need for fiscal adjustments to reduce pressures on the real exchange rate. It recommended structural reforms to improve productivity and competitive advantage.

Moreover, the IMF spotlighted concerns over transparency in the operations of the Special Investment Facilitation Council (SIFC).

“Established in August 2023, the SIFC’s objective to attract and facilitate investments requires incorporating projects into Pakistan’s Public Investment Management Assessment framework to ensure accountability and transparency,” the report advised. It emphasized the importance of maintaining equitable treatment for all investors, considering the SIFC’s ability to propose regulatory relaxations and immunities.

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