‘Accommodative policies resulted in uneven, unbalanced growth,’ says IMF

Pakistan must adhere to a market-determined exchange rate, pursue proactive and prudent monetary policy
<p>Photo:SAMAA/file</p>

Photo:SAMAA/file

Fallout from the Ukraine-Russia war abroad and Pakistan’s “accommodative policies” at home resulted in economic overheating resulting in unsustainable, uneven and unbalanced growth, creating financial problems for the country. Now, Islamabad needs to adhere to the outlined fiscal budget for 2022-23 apart from swallowing the bitter pill of market-determined exchange rates and introducing policies to improve governance of loss-making state enterprises.

This was stated Monday by Antoinette Sayeh, the Deputy Managing Director and Acting Chair of the International Monetary Fund’s (IMF) Executive Board, in a statement released after the board met on Monday to deliberate on and approve a $1.1 billion extended fund facility for Pakistan.

“Pakistan’s economy has been buffeted by adverse external conditions due to spillovers from the war in Ukraine,” Sayeh stated, adding that Pakistan is also facing grave economic challenges on the domestic front.

“Domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth,” she stated.

The statement added that these policies added to a difficult external environment and fueled domestic demand to unsustainable levels.

The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.

The solution?

“Steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth,” Islamabad was advised.

The IMF deputy managing director noted that Pakistan’s plans to achieve a small primary surplus in the fiscal year (FY) 2022-23 is a welcome step to reduce fiscal and external pressures and build business confidence.

“Containing current spending and mobilizing tax revenues are critical to create space for much-needed social protection and strengthen public debt sustainability,” she said, adding, “Efforts to strengthen the viability of the energy sector and reduce unsustainable losses, including by adhering to the scheduled increases in fuel levies and energy tariffs, are also essential.”

 International Monetary Fund (IMF) Deputy Managing Director Antoinette Sayeh. PHOTO: FILE
International Monetary Fund (IMF) Deputy Managing Director Antoinette Sayeh. PHOTO: FILE

“Further efforts to reduce poverty and protect the most vulnerable by enhancing targeted transfers are important, especially in the current high-inflation environment,” the board said.

Noting that tightening of monetary conditions through higher policy rates was necessary to contain inflation, the IMF deputy managing director said a tight monetary policy would help reduce inflation and help address external imbalances.

“Maintaining proactive and data-driven monetary policy would support these objectives. At the same time, close oversight of the banking system and decisive action to address undercapitalized financial institutions would help to support financial stability.

Preserving a market-determined exchange rate remains crucial to absorbing external shocks, maintaining competitiveness, and rebuilding international reserves.

“Accelerating structural reforms to strengthen governance, including of state-owned enterprises, and improve the business environment would support sustainable growth,” the IMF suggested, adding that reforms can create a “fair-and-level playing field for business, investment, and trade necessary for job creation and the development of a strong private sector are essential.”

New projections by the fund showed that Pakistan will likely see reduced growth from 5.7% for the last fiscal year to 3.5% for the ongoing fiscal year.

While unemployment will likely decrease, the country will see double digit inflation as it seeks to control its balance of payments and current account deficits while squeezing out more tax rupees.

The cumulative impact, however, was projected to nearly double the current foreign exchange currency reserves from around $9.82 billion to $16.226 billion even as government spending slows from Rs

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