EUR 9.10 For Business Accounts Only

Pakistan Strategy - IMF expresses satisfaction; focus on inflation, debt and energy sector sustainability moving forward, (AKD Daily, Jan 22, 2024)

IMF issues first review report: IMF issued a press release and staff report on the first review under the Stand-By Arrangement (SBA) over the weekend, which was followed by an immediate disbursement of US$700mn towards the country. The IMF expressed overall contentment with the accomplishment of key quantitative performance criteria (QPCs), Indicative targets (ITs), and Structural Benchmarks (SBs). In summary, the authorities emphasized that the program's success relies on the implementation of budgeted targets, the establishment of a market-determined exchange rate, effective functioning of the FX market, maintaining an appropriately tight monetary policy, and making progress on structural reforms (energy sector and SOE governance).

Real sector: The GDP’s contraction of 0.19% in FY23 was partly due to difficult external conditions, impact of floods and overall uneven policies during the period, resulting in the domestic demand consequently weakening. Moving forward, the lending partner indicated a general improvement in macroeconomic conditions, projecting the country's growth at 2.0%/3.5% for FY24/25F, alongside strengthened fiscal position with the authorities achieving a primary surplus target 0.4% during 1QFY24. The said growth was evidenced by recoveries in agriculture (+5.1%YoY) and industrial sectors (+2.5%) due to low base last year, consequently resulting in GDP to grow at 2.1% YoY during 1QFY24.

 

Inflation and Monetary Policy: With regards to price stability, inflationary pressures continue to remain elevated, with average/year-end CPI estimated at 24.0%/18.5% during FY24F (AKD estimate: 25.5%/19.2%). Core inflation continues to decline at a slow pace amidst sticky food and energy tariff prices (power and fuel tariff hikes), however, deceleration in reserve money growth (as seen 1HFY24) would continue to anchor down inflationary pressures during the second half. In terms of monetary policy, the regulatory body expressed contentment with the current policy setting at 22% amid subdued domestic demand. However, it reiterated a commitment to a more stringent stance may be needed incase short-term pressures were to resurface, particularly due to second-round energy tariff effects, aiming to maintain positive real interest rates in the longer run.

 

Fiscal sector: IMF reaffirmed the government's success in meeting revenue collection targets, coupled with the attainment of a primary surplus of PkR401 billion (0.4% of GDP) in 1QFY24. The revenue and expenditure goals outlined in the SBA stayed on course, with higher collections from the PDL, excise, and direct taxes compensating for softer import-related revenues. Moving forward, the lending authorities notified additional efforts to securing future targets, which includes FBR measures to notify actions against non-filers alongside other corrective measures to bring untaxed sectors into the formal economy. Moreover, energy subsidies (capped at PkR976bn) and salary/pension increases must align with SBA targets, alongside improved coordination with the provinces with regards to PSDP projects. Overall, the lending authority projects budget deficit of PkR8.1tn (7.5% of GDP) during FY24.