IMF Executive Board Concludes First Post-Program Monitoring Discussions with Pakistan

March 6, 2018

On March 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the first Post-Program Monitoring Discussions [1] with Pakistan.

Pakistan’s near-term outlook for economic growth is broadly favorable. Real GDP is expected to grow by 5.6 percent in FY 2017/18, supported by improved power supply, investment related to the China-Pakistan Economic Corridor (CPEC), strong consumption growth, and ongoing recovery in agriculture. Inflation has remained contained.

However, continued erosion of macroeconomic resilience could put this outlook at risk. Following significant fiscal slippages last year, the fiscal deficit is expected at 5.5 percent of GDP this year, with risks towards a higher deficit ahead of upcoming general elections. Surging imports have led to a widening current account deficit and a significant decline in international reserves despite higher external financing. The FY 2017/18 current account deficit could reach 4.8 percent of GDP, with gross international reserves further declining in a context of limited exchange rate flexibility. Against the background of rising external and fiscal financing needs and declining reserves, risks to Pakistan’s medium-term capacity to repay the Fund have increased since completion of the Extended Fund Facility (EFF) arrangement in September 2016. [2]

Executive Board Assessment

Directors took note of Pakistan’s favorable growth momentum, but noted with concern the weakening of the macroeconomic situation, including a widening of external and fiscal imbalances, a decline in foreign exchange reserves, and increased risks to Pakistan’s economic and financial outlook and its medium‑term debt sustainability. In this context, they urged a determined effort by the authorities to refocus near‑term policies to preserve macroeconomic stability.

Directors welcomed the authorities’ move to allow some exchange rate adjustment last December, but stressed the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness. They also encouraged the authorities to phase out administrative measures aimed at supporting the balance of payments as soon as conditions allow to minimize potential economic distortions.

Directors noted that the external sector pressures are in part linked to the fiscal deterioration during the last fiscal year and an accommodative monetary policy stance, as well as the high imports related to the China‑Pakistan Economic Corridor projects. They called on the authorities to strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while protecting pro‑poor spending. Complementing the recent increase in the policy interest rate with further monetary tightening would be important to address inflationary risks and help reverse external imbalances. Directors also emphasized the need for prudent debt management and caution in phasing in new external liabilities, and the urgency of tackling rising fiscal risks stemming from continued losses in public sector enterprises.

Directors underscored the importance of accelerating structural reforms to reinforce macroeconomic stability, raise competitiveness, and promote higher and more inclusive growth. They highlighted the need to strengthen the fiscal federalism, monetary and financial policy frameworks; further enhance the AML/CFT regime; improve the business climate; continue to strengthen governance; achieve cost‑recovery in the energy sector; and expand social safety nets to protect the most vulnerable.


Table 1. Pakistan: Selected Economic Indicators, 2014/15–2017/18 1/

Population: 207.8 million (2016/17; provisional)

Per capita GDP: US$1,463 (2016/17)

Poverty rate: 29.5 percent (2012/13)

Main exports: Textiles ($12.8 billion, 2015/16)

Unemployment: 5.9 percent (2014/15)

2014/15

2015/16

2016/17

2017/18

(Annual percentage change)

Output and prices

Real GDP at factor cost

4.1

4.5

5.3

5.6

GDP deflator at factor cost

4.3

0.6

3.5

5.0

Consumer prices (period average)

4.5

2.9

4.1

5.0

Consumer prices (end of period)

3.2

3.2

3.9

5.4

Pakistani rupees per U.S. dollar (period average)

-1.5

2.9

0.4

…

(In percent of GDP)

Saving and investment

Gross saving

14.7

13.8

11.7

12.2

Government

-1.6

-0.7

-0.7

-0.3

Nongovernment (including public sector enterprises)

16.3

14.5

12.4

12.5

Gross capital formation 2/

15.7

15.6

15.8

17.0

Government

3.7

3.7

5.0

5.0

Nongovernment (including public sector enterprises)

12.0

11.8

10.8

12.0

Public finances

Revenue and grants

14.5

15.5

15.7

15.8

Expenditure (including statistical discrepancy)

19.1

19.2

21.1

21.2

Budget balance (including grants)

-5.3

-4.4

-5.7

-5.3

Budget balance (excluding grants)

-5.4

-4.6

-5.8

-5.5

Primary balance

-0.5

-0.1

-1.4

-1.3

General government debt incl. IMF obligations

63.3

67.6

67.2

67.2

External general government debt

18.9

20.8

20.6

22.2

Domestic general government debt

44.4

46.8

46.6

45.0

(Annual changes in percent of initial stock of broad money, unless otherwise indicated)

Monetary sector

Net foreign assets

2.2

1.7

-3.2

-2.9

Net domestic assets

11.0

11.9

16.9

17.1

Broad money (percent change)

13.2

13.7

13.7

14.2

Reserve money (percent change)

9.9

26.5

22.5

18.6

Private credit (percent change)

5.9

11.1

16.6

16.5

Six-month treasury bill rate (period average, in percent)

8.8

6.3

5.9

…

External sector

Merchandise exports, U.S. dollars (percentage change)

-3.9

-8.8

-0.2

10.0

Merchandise imports, U.S. dollars (percentage change)

-1.0

0.0

17.5

10.2

Current account balance (in percent of GDP)

-1.0

-1.7

-4.1

-4.8

(In percent of exports of goods and services, unless otherwise indicated)

External public and publicly guaranteed debt

159.8

193.3

210.1

220.7

Debt service

20.7

22.2

30.2

26.2

Gross reserves (in millions of U.S. dollars) 3/

13,534

18,143

16,141

12,099

In months of next year's imports of goods and services

3.2

3.7

3.0

2.2

Memorandum items:

Underlying fiscal balance (excl. grants; percent of GDP) 4/

…

…

-6.3

-5.9

General government and government guaranteed debt (incl. IMF; % GDP)

65.7

70.0

69.7

69.7

Net general government debt (incl. IMF; % GDP)

58.2

61.2

61.6

62.4

Real effective exchange rate (annual average, percentage change)

10.9

4.6

3.6

…

Terms of trade (percentage change)

7.0

10.6

0.2

-4.9

Real per capita GDP (percentage change)

2.0

2.5

3.3

3.6

GDP at market prices (in billions of Pakistani rupees)

27,443

29,103

31,862

35,381

GDP at market prices (in billions of U.S. dollars)

270.6

278.9

304.0

…

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections.

1/ Fiscal year ends June 30.

2/ Including changes in inventories

3/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

4/ Excludes one-off transactions, including asset sales


[1] The central objective of Post-Program Monitoring (PPM) is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability.

[2] On September 4, 2013, the Executive Board approved a 3-year arrangement under the EFF for Pakistan in an amount equivalent to SDR 4.393 billion.

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