Saul Loeb—AFP
The International Monetary Fund (IMF) on Friday warned of significant risks to Pakistan’s reform implementation, emphasizing the potential of instability due to protests triggered by high food and fuel prices.
In a report issued after completion of the seventh and eighth reviews that led to the release of a $1.16 billion tranche from the global lender to Islamabad, it said risks to the “outlook and program implementation remain high and tilted to the downside given the very complex domestic and external environment.” In addition to high food and fuel prices resulting from the war in Ukraine, it said, tighter global financial conditions would continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability.
“Policy slippages remain a risk, as evident in FY22, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting. Socio-political pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament. Furthermore, high food and fuel prices could prompt social protest and instability,” it said, stressing this could undermine the ongoing program’s fiscal adjustment strategy, jeopardizing macro-financial and external stability and debt sustainability.
The global lender said Debt Sustainability Analysis had highlighted that public debt remains sustainable over the medium-term with strong policies and robust growth, albeit with increased uncertainty. “Substantial risks stem from higher interest rates, a larger-than-expected growth slowdown, pressures on the exchange rate, renewed policy reversals, weaker medium-term growth, and contingent liabilities related to [state-owned enterprises],” it said, adding further delays to structural reforms could hamper financial sector stability and reduce the effectiveness of the monetary policy. It also warned of more threats from climate change-induced disasters.
Weak implementation
Noting Pakistan’s program implementation had “deteriorated shortly after the completion of the sixth review,” the IMF said the programmed fiscal adjustment had been undone and several key EFF commitments reversed. “Two end-June performance criteria—on net international reserves and the primary budget deficit—as well as three continuous PCs were missed,” it said, adding seven structural benchmarks had not been met. “However, more recently, the authorities have taken several actions to bring the EFF back on-track, including passing an ambitious budget for a primary surplus, significantly increasing the policy rate, eliminating post-tax fuel subsidies, and increasing fuel taxation and electricity tariffs,” it said of the measures taken by the incumbent government.
Reversed commitments
Referring to the ousted Pakistan Tehreek-e-Insaf (PTI)-led government, the IMF report stressed that its 4-month “relief package” of February had reversed commitments to fiscal discipline from earlier in the year. “The largely untargeted package (i) reduced petrol and diesel prices (through a generous general subsidy and setting fuel taxes at zero taxation); (ii) lowered electricity tariffs by Rs. 5/kwh for almost all households and commercial consumers; and (iii) provided tax exemptions and a tax amnesty,” it said, adding these measures were also accompanied by the deferral of regular electricity tariff increases; increases to the minimum wage and public wages and pensions; and additional food subsidies. “The retention of these measures, as well as additional slippages in Q3 and Q4 widened FY22’s fiscal deficit by more than 1.5 percent of GDP, missing the end-June fiscal target by a wide margin,” it noted.
Going forward
According to the IMF, the EFF inked between it and Pakistan seeks to restore fiscal discipline and debt sustainability while protecting social spending, safeguarding monetary and financial stability, and maintaining a market-determined exchange rate and rebuilding external buffers. “New structural benchmarks support efforts to enhance social protection, strengthen energy sector viability, and support financial stability,” it said, noting that goals of mobilizing additional high-quality tax revenue and substantially increasing reserve coverage “are out of reach.”
In a note from the IMF staff that participated in negotiations to revive the EFF, the global lender said program risks remained “exceptionally high” and stressed that consistent and decisive implementation would be essential to improve the country’s economic prospects.