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EVALUATION OF THE IMF PROGRAM

EVALUATION OF THE IMF PROGRAM. BY Dr. Hafiz A. Pasha* *former Finance Minister; Deputy Chairman, Planning Commission and Vice Chancellor University of Karachi. The Economic Situation. 2012-13 Growth rate remains low at about 3.5% Rate of Inflation down to 7.4%

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EVALUATION OF THE IMF PROGRAM

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  1. EVALUATION OF THE IMF PROGRAM BY Dr. Hafiz A. Pasha* *former Finance Minister; Deputy Chairman, Planning Commission and Vice Chancellor University of Karachi

  2. The Economic Situation 2012-13 • Growth rate remains low at about 3.5% • Rate of Inflation down to 7.4% • Large Fiscal Deficit of over Rs 1830 billion, 8 % of GDP • Balance of Payments Deficit of $2.3 billion, with current Account Deficit:- $2.3 billion Capital/Financial Account Surplus: - % 0.0 billion • Plus Repayment to IMF of $ 2.5 billion • Decline in Foreign Exchange Reserves of $ 4.8 billion, from $ 10.8 billion at the end of 2011-12 to $ 6 billion at end of 2012-13

  3. The Economic Situation 2013-14 • Peak Repayments to IMF in 2013-14 of $ 3.2 billion • With ‘Business as Usual’ Scenario ,danger of default by Pakistan, unless drastic steps taken • Recourse to IMF, Global Lender of Last Resort and Policy of Government of NEW LOAN TO REPAY OLD LOAN

  4. Key Features of IMF Program • Three Year Under Extended Fund Facility (EFF), with focus on structural reforms • Access to 425 % of Quota; Amount $6.6 billion • 5 ‘Tough’ Prior Actions • Initial Release of $ 544 million, 12 quarterly installments following successful ‘review’ each time • 5 Performance Criteria; 11 Structural Benchmarks; 9 to be completed by June 2014

  5. Objectives Of the Program‘Stabilize First; Revive Later’ 2013-14 MACROECONOMIC STABILIZATION Balance of Payments • Improve Balance of Payments from Deficit of $2.3 billion to surplus of $ 4.6 billion • Raise FE reserves from $6 billion to $ 9.6 billion by end of 2013-14 BUDGET • Reduce fiscal deficit to 5.8 % of the GDP from 8% of GDP

  6. Policy Instruments Balance of Payments • Depreciate the Rupee by 14 % • Interest Rates to rise with Rate of Inflation • Higher inflow of Aid from World Bank, ADB, etc., due to Program Budget • Taxation Proposals in Budget of over Rs 200 billion (GST, direct taxes etc) • Reduce Subsidy by substantial Jump in Power Tariff • Higher taxation of Gas • Cut Development Expenditure by 25 %

  7. Current Position At the End of First Quarter of 2013-14 • Projected FE Reserves by IMF at end - September of $ 5.6 billion; Actual Reserves of $ 4.6 billion. THEREFORE, PROGRAM IS ALREADY OFF-TRACK • Projected depreciation of Rupee in the Program of 14 percent in 2013-14; Already 7 percent in the first three months • Shortfall in CSF inflow of $ 300 million • Budgetary Position is better at 1.6 percent of the GDP in first quarter of 2013-14; but almost Rs. 500 billion printing by the Central Bank (SBP) • FBR revenue growth of 17-18 per cent; as compared to target growth rate of 23 per cent • ‘Core` Inflation rate close to 9 percent in September; compared to annual projection of below 8 percent in the program

  8. Current Position • In November, large repayment to IMF of over $700 million; FE reserves could fall to below $3.5 billion, not enough for even one month’s import cover. Therefore, rupee could come under severe pressure.

  9. Projected Level of Foreign Exchange Reserves One Month’s Import Cover

  10. Contingency Planning • Implement Policy of Import Compression by • early withdrawal of SROs • regulatory duties on non-essential imports • raise import margin requirements • other punitive measures • Seek more front loading of releases from IMF • Further cut in development expenditure, except for projects in power and water sectors • Implement further cuts in non-salary expenditure • Tight Limit to overdraft of Provincial Governments

  11. Projection of Key Macro Economic Variables in 2013-14 IMF Red

  12. The Future • Pakistan is poised on the `Knife edge` in 2013-14, even in the presence of an IMF program • Danger of rising inflation and loss of growth • Improvement in the economic situation will also hinge on • The Security Situation • Level of Power Load shedding • If Pakistan manages to build up reserves of $7 billion or so ( 1 ½ month’s import cover) by June 2014 then conditions will improve in 2014-15 and beyond as net receipts will take place from IMF • Pakistan can then start a program of economic revival and try to achieve 6 per cent growth rate by 2016-17.

  13. Thank You

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