On June 14, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Pakistan.

Pakistan’s outlook for economic growth is favorable, with real GDP estimated at 5.3 percent in FY 2016/17 and strengthening to 6 percent over the medium term on the back of stepped-up China Pakistan Economic Corridor (CPEC) investments, improved availability of energy, and growth-supporting structural reforms. Inflation has been gradually increasing but remains contained, and the financial sector has remained sound.

However, macroeconomic stability gains made under the 2013-16 EFF-supported program have begun to erode and could pose risks to the economic outlook. Fiscal consolidation has slowed, with the 2016/17 budget deficit target of 4.2percent of GDP (authorities’ latest projection) likely to be exceeded. The current account deficit has widened and is expected at 3 percent of GDP in 2016/17, driven by quickly rising imports of capital goods and energy. Foreign exchange reserves have declined in the context of a stable rupee/dollar exchange rate. On the structural front, while the successful implementation of business climate and financial inclusion reforms has continued, some renewed accumulation of arrears in the power sector has been observed, and financial losses of ailing public sector enterprises continue to weigh on scarce fiscal resources. Key external risks include lower trading partner growth, tighter international financial conditions, a faster rise in international oil prices, and over the medium term, failure to generate sufficient exports to meet rising external obligations from large-scale foreign-financed investments.

Executive Board Assessment [2]

Directors commended the Pakistani authorities for strengthening macroeconomic resilience during their 2013–16 Fund‑supported program. Directors agreed that the growth outlook remains favorable, but noted that policy implementation weakened recently and macroeconomic vulnerabilities are reemerging. Against this backdrop, Directors called on the authorities to safeguard the macroeconomic gains of recent years through continued implementation of sound policies, and to continue with structural reforms to achieve higher and more inclusive growth.

Directors encouraged the authorities to strengthen fiscal consolidation. They noted that the FY 2017/18 budget aims at further gradual consolidation, albeit at a slower pace than targeted under the Fiscal Responsibility and Debt Limitation (FRDL) Act, and will likely require additional revenue measures in light of recent revenue underperformance. Directors emphasized that sustained fiscal consolidation over the medium term, in line with the FRDL Act, is critical to strengthen economic resilience, safeguard fiscal sustainability, and limit pressures on the current account and international reserves. To this end, Directors recommended mobilizing additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bill’s growth, further reducing electricity subsidies, and increasing priority social spending. They also recommended strengthening the national fiscal federalism framework and public debt management.

Directors stressed the importance of maintaining a prudent monetary policy stance to preserve low inflation. They noted that monetary policy has been appropriately accommodative, and urged the State Bank of Pakistan (SBP) to remain vigilant and be ready to tighten it in case inflationary pressures emerge or foreign exchange market pressures intensify. Directors called on the authorities to allow for greater exchange rate flexibility—rather than relying on administrative measures—to help reduce external imbalances and bolster external buffers. In this regard, they welcomed the authorities’ commitment to remove, within one year, the cash margin requirement for imports of consumer goods, which constitutes an exchange restriction and multiple currency practice. Directors welcomed ongoing progress in strengthening central bank autonomy, and called for implementing the remaining recommendations from the 2013 Safeguards Assessment and to phase out government borrowing from SBP. Directors saw many of the abovementioned measures as preconditions for moving to an inflation targeting regime in the medium term.

Directors underscored the importance of further advancing financial sector reforms to continue strengthening resilience and support financial deepening. They welcomed efforts to bring undercapitalized banks into regulatory compliance, further strengthen the regulatory and supervisory frameworks, address non‑performing loans, and enhance the AML/CFT framework. Directors looked forward to the operationalization of the new deposit insurance.

Directors stressed that further progress in the structural reform agenda is needed to make growth more inclusive and reduce poverty. They welcomed the progress in fostering financial inclusion and implementing the business climate reform strategy, and encouraged the authorities to press ahead with these efforts. Directors also recommended further strengthening social safety nets. They called for maintaining a strong regulatory framework in the energy sector, swiftly addressing the renewed build‑up of arrears in the sector, and ensuring its financial soundness. Directors noted that restructuring and attracting private sector participation in public enterprises as well as improving their governance will ensure their financial viability and economic efficiency while reducing fiscal risks.