IMF
faults Pakistan's optimism on
economy By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund
(IMF) has criticized Pakistan's economic
projections, saying the country's economic
vulnerabilities will further increase in the
remainder of the fiscal year ending June.
The fund has projected the country's
economic growth at 3.4%, against the government's
projection of 4.2%, and the fiscal deficit to
reach 7% of gross domestic product (GDP), against
the government's revised target of 4.7% for the
current fiscal year.
The IMF has
criticized the State Bank of Pakistan for pursuing
a more accommodative monetary policy and financing
the fiscal deficit directly or indirectly through
liquidity injections via open market operations.
The international lender's comments came in
report following the
conclusion last week of its Article IV
consultation.
Local analysts believe that
the strongly worded note is likely to put the
falling rupee under further pressure.
The
IMF warned that Pakistan's economy remains deeply
at risk to both internal and external shocks. A
ballooning fiscal deficit could create great
difficulties for the government in arranging
financing and force it to rely even more on
domestic bank borrowing in the absence of any
budgetary support from foreign countries or
multilateral institutions.
"To address
these vulnerabilities, a short-term action plan is
needed that includes strengthening of public
finances, and a tightening of monetary policy if
inflation increases," Dawn reported Adnan Mazarei,
the IMF's Washington-based Mission Chief for
Pakistan, as saying. "The State Bank has been
injecting large amounts of liquidity into the
money markets, which will push up prices, and
eventually raise considerable pressures on
interest rates."
Government borrowing from
the banking system has increased by 136% in the
year to January 2, climbing to 813.79 billion
rupees from 344.58 billion rupees, according to
the central bank. The government domestic debt and
liabilities have surged 28.42% in the 12 months to
December, to 7.05 trillion rupees.
The
Washington-based IMF has warned the country over
slow growth, which has caused unemployment higher
than the official figure of 6.6%. About 7% annual
growth, compared with the present 3-4% expansion
in gross domestic product, is required to
accommodate the 2 million or so people who enter
the labor force every year.
Local analysts
fear the IMF report could create panic in the
money market where rupee is continuously slipping
against the greenback.
"The IMF has
assessed the situation, which is quite contrary to
what the [Pakistan] economic team has been
conveying to the political leadership, but it will
surely bring the rupee under further pressure",
The Express Tribune reported Ashfaque Hasan Khan,
the Dean of Business School of National University
of Science and Technology(NUST) as saying.
The rupee has continuously weakened
against the US dollar during the almost four years
of the present coalition government led by Prime
Minister Yousuf Raza Gilani. Under former
government of prime minister Shaukat Aziz, the
rupee remained stable at around 60 to the US
dollar, compared with the present value of 90 to a
dollar. The rupee was being traded at 85.97 to a
dollar at the end of the last fiscal year in June
2011.
The rupee lost 27% against the
dollar between July 2008 and December 8, 2011,
according to Dawn. In the past month, it has
declined about 3.5%.
The IMF, identifying
the failure of loose monetary policy to spur
economic growth while feeding double-digit
inflation, urged the government to tighten its
"too accommodative" stance.
Inflation in
January returned to double digits just a month
after dropping to 9.75% in December, the first
single-digit increase since November 2009.
Consumer Price Index (CPI) rose 10.1% in January
from a year earlier and rose to 1.54% compared
with the previous month, the highest in the
current fiscal year.
Local analysts argue
that Pakistan's inflation is driven by high oil
prices and has hardly any connection with the
interest rate. This month, the government
increased petroleum prices by up to 6% to generate
an additional 3 billion rupees in revenue.
The central bank in its monetary policy
for October-November 2011 cut the discount rate by
150 basis points to 12%, departing from its
previous policy of monetary tightening that was
pursued over the past few years under IMF
pressure. High interest rates held back growth and
decelerated economic activity, bringing industries
to the verge of collapse.
Pakistan has to
repay an $8 billion IMF loan next month. Repayment
in the absence of further fund inflows could
trigger panic, particularly in the currency
market.
"The central bank's ability to
further intervene in the forex markets ... is
weighed down by upcoming debt repayments," Reuters
reported Saad Khan, an economist at brokers Arif
Habib Ltd, as saying. "Although the global
re-balancing act has remained skewed towards
emerging and developing markets, the prospects of
Pakistan benefiting from this preference shift are
fairly narrow, so a turnaround in the rupee does
not look possible in the medium term."
Syed Fazl-e-Haider
(http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author
of many books, including The Economic
Development of Balochistan (2004). He can be
contacted at sfazlehaider05@yahoo.com.
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