Pakistan at 'high risk' of economic crisis: IMF
13 September, 2013
ISLAMABAD: The International Monetary Fund gave Pakistan a sobering assessment on Thursday, saying its economy was at a high risk of deteriorating into crisis and growth was too slow to significantly improve people's living standards.
The global lender has approved a $6.7 billion loan package to help Pakistan revive its ailing economy, rebuild reserves and prevent a balance of payments crisis. "Economic performance in Pakistan has been substandard in recent years," the IMF said, adding that gross domestic product growth averaged only 3 percent over the past five years. "Executive directors noted that Pakistan's economic vulnerabilities and crisis risks are high, with subpar growth and unsustainable fiscal and balance of payments positions."
Pakistan averted a balance of payments crisis in 2008 by securing a $11 billion IMF loan but that was suspended two years ago after economic and reform targets were missed. Chronic gas and electricity shortages, violent crime and a Taliban insurgency have all hampered growth and contributed to falling foreign investment in Pakistan. "A lack of reliable electricity supply and a difficult security situation in large parts of the country have contributed to the deterioration," the IMF said, while welcoming the new government's economic reform programme.
The Pakistani rupee depreciated about 5 percent against the dollar during the 2012/13 fiscal year. A decade ago annual economic growth rates were about 10 percent. To secure the latest programme, Pakistan had to fulfil conditions set by the IMF, including slashing costly subsidies on electricity and sending out notices to 10,000 delinquent taxpayers.
The IMF has warned Pakistan that its economic growth could be worse than expected next year due to strict austerity measures built into a $6.7 billion rescue loan. During the last five years, the national GDP has averaged only three percent, far short of the seven percent considered necessary to lift the country out of poverty and fully absorb the growing labour force. Central bank reserves have fallen to $6 billion, down from $14.78 billion in fiscal year 2010-11 and are enough only to cover imports for one and a half months.
On September 5, the IMF agreed to extend Pakistan a three-year $6.7 billion loan, making an initial disbursement of $540 million available to the authorities. The loan is aimed at reducing Pakistan's fiscal deficit – which neared nine percent of gross domestic product last year – to a more sustainable level and reform the energy sector to help resolve severe power cuts that have sapped growth potential. But future disbursements are dependent on the completion of tough economic reforms measured at quarterly reviews.
In Pakistan, only around 250,000 people pay income tax, while agriculture, which still accounts for 50 percent of the economy, is totally exempt. To repair the economy, Prime Minister Nawaz Sharif has promised to widen the tax base, improve the image of paying taxes and limit corruption. The IMF said his budget for the fiscal year to June 30, 2014 "represents an important initial step" but cautioned that "a more efficient and equitable tax system is needed". Austerity will also push down growth. Before Thursday, the IMF predicted growth of 3.5 percent of GDP but has revised that down to 2.5 percent if the necessary reforms are implemented.
In announcing the loan, the IMF said Pakistan's adherence to the programme would likely encourage financial support from other donors. The Asian Development Bank has this week announced that it will invest $245 million in Pakistan's power distribution systems.