IMF Expresses Satisfaction Yet Cautions on Pakistan’s Economic Reforms and Risks

Islamabad, The International Monetary Fund (IMF) has expressed overall satisfaction with Pakistan's adherence to the benchmarks set under the Stand-By Arrangement (SBA), but cautions on elevated downside risks and emphasizes the necessity for continued economic reforms. The IMF's recent staff report follows the disbursement of US$1.1 billion to Pakistan in late April 2024, recognizing the country's efforts in meeting key quantitative performance criteria and structural benchmarks.

According to AKD Securities Limited, despite achieving a primary surplus and improved revenue collections, the IMF revised down Pakistan's growth forecast for FY24 to 2.0% from an initial 2.5%, attributing this adjustment to weaker than anticipated domestic demand. However, the medium-term growth projections remain stable with expected rates of 3.5%, 4.5%, and 5.0% for FY25, FY26, and FY27 respectively. The report highlighted significant improvements in the fiscal and external sectors, with an emphasis on the need for Pakistan to maintain a tight monetary policy and to make progress on structural reforms, particularly in the energy sector and state-owned enterprise governance.

Fiscal performance in the first half of FY24 saw a primary surplus of PKR 1.8 trillion, supported by robust revenue collections and federal spending restraint. The IMF stressed the importance of continuing to meet revenue targets and maintaining fiscal discipline to ensure the sustainability of these gains. On the monetary front, although headline consumer price index (CPI) inflation is on a decline, partly due to favorable base effects, inflationary pressures remain high with core inflation being persistently elevated due to sticky food and energy prices.

Externally, the IMF appraised the cessation of multiple currency practices and the removal of exchange restrictions as positive steps towards modernizing the foreign exchange market. This is seen as crucial for building a buffer against future shocks and facilitating the rebuilding of central bank reserves.

The report also discussed the energy sector, urging timely adjustments to power tariffs to prevent the accumulation of circular debt, and recommended reforms including the implementation of semi-annual gas price adjustments and the privatization of distribution companies to improve efficiency.

Despite these positive developments, the IMF warns of significant political uncertainties and potential policy slippages which could exacerbate debt sustainability risks and apply pressure on the domestic exchange rate. The ongoing geopolitical tensions also pose additional external stability risks.