IMF sees Pakistan GDP expanding at 3pc in 2009-10

ISLAMABAD: The International Monetary Fund (IMF) says the political and security situation in Pakistan remains challenging, economic reform does not command broad support and adverse security developments continue to hurt the confidence of domestic and foreign investors. 
 
As a result, projected economic growth for 2009-10 would be a modest three per cent, IMF says in a programme note on Pakistan issued following the approval of the fourth tranche of $1.2 billion by the Executive Board in Washington on Wednesday.


The IMF note says: ‘Although there are modest signs of recovery in some sectors, manufacturing mainly in textile situation remains depressed, with a related drop in exports. Notwithstanding some recent signs of recovery, global economic activity has declined since the beginning of the current programme and affected economic activity in Pakistan,’ the Fund observed.

The IMF note while saying that Pakistan’s economic programme is subjected to an unusual degree of uncertainty from both domestic and external factors, domestic security was requiring higher budget expenditures that put increasing pressure on the fiscal position. Externally, the pace and extent of the recovery of the global economic recovery remains uncertain, it says.

Despite these risks, the IMF programme can continue to build on initial success in stabilising the economy. External donors made generous pledges to Pakistan at the donor meeting in Tokyo in April 2009; it is crucial that these pledges be disbursed promptly to support priority budget spending and reform, IMF emphasises.

To sustain additional spending over the medium term, however it remains crucial that Pakistan raise tax revenue and in this regard the introduction of a broad-based value-added tax (VAT) in July 2010 is essential.
The IMF programme got off to a good start and Pakistan’s economy has continued to stabilise.

Macroeconomic imbalances have shrunk and inflation has fallen. The exchange rate has become somewhat more flexible and foreign currency reserves have increased from $3.3 billion in November 2008 before the Stand-by Arrangement to $9.9 billion in mid-December 2009.

The IMF note states the demand for treasury bills has increased, allowing the government to retire some of its debt to the central bank. After an initial increase in the policy rate of 200 basis points in November 2008, as the economic and financial situation improved, the authorities were able to lower the policy interest rate by 250 basis points in three steps since April 2009.

Raising budget revenues, however, has been challenging and the authorities are striving to maintain fiscal discipline by eliminating non-priority spending. Nevertheless, the budget deficit target, excluding grants for end-September 2009 and 2009-10 was missed by 0.3 and 0.9 percentage points of GDP, respectively