Slow and steady stability

With economic stability taking hold despite its fragility, all eyes are now on the first biannual review of the current $7 billion International Monetary Fund (IMF) funding programme.

An IMF mission is expected to arrive here towards the end of this month or early March, according to Finance Minister Muhammad Aurangzeb; the lender is yet to confirm the dates.

In response to a question at the post-monetary policy briefing last Monday, State Bank of Pakistan (SBP) Governor Jameel Ahmed expressed the hope that the review will go ahead as planned. The ongoing 37-month Extended Funded Facility programme consists of six reviews over the life of the bailout, and the release of the next tranche of approximately $1bn will be contingent on the success of the performance review.

Most analysts are hopeful of Pakistan meeting the majority of the performance targets related to, among others, the international reserves, primary budget surplus, and the net domestic assets of the SBP. A Topline Securities analyst noted that the government is in “compliance with the majority of the IMF targets”. The latest data for some of the criteria, like cash transfers under the Benazir Income Support Programme, isn’t available as yet.

The country’s economy turns a corner as analysts highlight the positive, if fragile, road to recovery

At the same time, some indicative targets, like the Federal Board of Revenue (FBR) tax revenue and the tax collection under the Tajir Dost scheme, will be missed. The shortfall in the FBR tax collection has soared to Rs468bn in the first seven months of the present fiscal year, while only a tiny fraction of tax is recovered under the Tajir Dost scheme. It is hoped that the tax shortfall will not impact the outcome of the IMF review.

Indeed, the country’s economy has come a long way from the edge of a default. A sharp fall in the headline consumer price index inflation and external account stability inspiring in the SBP the confidence to cumulatively slash the interest rates by 1,000bps to 12 per cent in six consecutive sessions since June 2024. In its latest policy decision, the central bank took a break from its earlier aggressive monetary policy, slashing the rates by 100bps.

The primary driver of the rate reduction is the continued downward trend in inflation, primarily due to a high base effect and improved supply-side dynamics. However, the bank points out that the core inflation still remains elevated, with the governor saying the 1,000bps reduction in the policy rate over the past seven months is expected to support economic activity in the coming months.

Although the monetary policy statement underlined that it is necessary to adopt a cautious monetary policy stance to safeguard price stability and that maintaining a sufficient positive real policy rate on a forward-looking basis is essential to stabilise inflation within the target range of 5-7pc, it gave no clue as to the bank pausing the ongoing monetary easing cycle to preserve the fragile stability.

The analysts nonetheless believe that the risks to inflation — volatile global commodity prices, protectionist policies in major economies, timing and magnitude of administered energy tariff adjustments, volatile perishable food prices, and any additional tax measures to meet the FBR target — mentioned in the statement could force the SBP to break the monetary easing cycle, or at least opt for moderation in the pace of rate cuts.

In the light of recent economic developments, the State Bank has revised its projections about important macroeconomic indicators for the current fiscal year, saying the current account is expected to run a surplus of 0.5pc of GDP, with international reserves rising to $13bn on increasing remittances and a slight growth in exports in spite of heavy debt payments. This should reduce the government’s financing requirement (net of rollover/refinance amount) from earlier $11.3bn to $8.7bn, according to Topline Securities.

It also has revised down its projections for the average annual inflation to 5.5-7.5pc, or close to its targeted range, from its original estimate of 11.5-13.5pc for this fiscal year. This means that the SBP still has enough room to continue the monetary easing cycle as real interest rates stand at 790bps, much higher than the historic average of 200-300bps, with the December inflation at 4.1pc. It has maintained its projections for GDP growth at 2.5-3.5pc.

As mentioned above, the country’s economy has indeed turned a corner. This has encouraged the government to devise a homegrown five-year economic transformation plan, “Uraan Pakistan”. This initiative aims to achieve 6pc GDP growth by 2028 through public-private partnerships and enhance exports to $60bn.

Many have warned the authorities not to press the growth accelerator, despite improving indicators, without first addressing the structural imbalances facing the economy as the recovery remains fragile. The long-term stability and policy reforms, rather than unsustainable faster growth, should be the priority for the government to avoid another economic crisis. This is exactly the purpose of the IMF programme.

Published in Dawn, The Business and Finance Weekly, February 3rd, 2025