The International Monetary Fund (IMF) has urged Pakistan to focus on its external sector and budget by taking immediate policy action.
Tokhir Mirzoev, IMF Resident Representative in Pakistan said,
Pakistan still has sizeable external buffers which need to be preserved with the right policy mix aimed at correcting both external and fiscal imbalances. With sufficient policy effort, Pakistan can address these challenges without the IMF.
However, according to the country’s collected records of the fiscal year 2016-17, it may require another IMF programme.
The official projection for the fiscal year 2017 was of $4.5 billion, however $12.1 billion worth of current account deficit was recorded by Pakistan.
The budget deficit also widened to 5.8% of the gross domestic protect, amounting to Rs 1.863 trillion as compared to the initial set target of 3.8%.
With respect to the fiscal situation, Mirzoev said
Significant effort will be needed to meet this fiscal year’s ambitious targets, especially with respect to revenue mobilisation. At the same time, policymakers have to find solutions to shortcomings of the fiscal federalism system. As highlighted during last Article IV consultations, it is unbalanced and prone to shocks.
Reason Behind The Extra Budget Deficit
The provincial governments spent an extra Rs 163.2 billion leading to the Rs 1.863-trillion budget deficit.
The federal government was however hopeful that a cash generation of Rs 339 billion by the provinces would keep the overall budget deficit within limits.
“Not everything is going wrong in the economy”
Mirzoev was however hopeful and struck a positive note regarding Pakistan’s economy,
“Not everything is going wrong in the economy. The economic growth has been strong and is picking up. The challenge is to make this growth more balanced, so that it involves more exports and does not overburden the balance of payments.”
He also highlighted that August had proven to be successful for the country’s economy. He added that there was an increase in exports, foreign direct investment and a moderation in imports. Tax revenue outcome also seemed promising.
“It is too early to tell whether the month of August was an exception or a sign of normalisation,” he said.
Need Better Policies for Improving Fiscals
The balance of payments released by the State Bank of Pakistan, revealed a current account deficit of $2.6 billion which was 102% higher than the previous fiscal year during the same period.
The federal government is considering an increase on the customs duty in an effort to discourage imports. However IMF was fairly skeptical of the government’s plan to increase customs duty for containing imports.
Using administrative measures to correct the external imbalances is rarely effective. Such measures tend to have a limited impact and often produce significant distortions in the economy. Most importantly, administrative measures do not make an economy more competitive in the long run,