IMF Forecasts Pakistan's Economic Prospects
Waqar Hashmi & Saad Malik
According to IMF's World Economic Outlook released recently, Pakistan's population is projected to reach up to 200 million by 2017-18, posing more challenges to the policy makers. GDP growth is expected to fall to 3.1pc in 2014 from 3.6pc in 2013, steadily growing back to respected mark of 5.0pc by 2018 provided the security & energy concerns are addressed dynamically. Monetary policy has been accommodating as inflation began to decelerate. Further upward revisions to electric and gas tariffs, as well as a levy to support gas infrastructure development, are expected to keep inflation elevated over the coming years. Inflation would continue to rise till 2015, to an annual rate around 9pc. However, after the upward revisions in the power tariffs have taken place and a cheaper energy mix has been established the rate of inflation would start to decline from 7pc in 2016 to 6pc in 2017.
Fixed investment continued its downward trend, falling from 14.9pc in 2012 to 14.2pc of GDP in 2013. However, total investment is expected to pick-up in coming years gradually reaching to the level of 20pc of GDP in 2018.
The current account deficit narrowed to 1pc of GDP in 2013, with improvement in the trade deficit, a lower service account deficit following receipts under the CSF, and continued inflows of worker remittances. Exports overall are expected to grow further in the remainder of the forecasted years, as benefits from the Generalized Scheme of Preferences Plus are realized, hence, the forecasted YoY growth of 8.8pc in 2014. Going forward, growth in exports is likely to remain robust, and the rate of growth in imports is likely to decline to 4.6pc in 2019.
Achieving fiscal sustainability has been a major recurring challenge for policy makers in Pakistan. Fiscal discipline has eroded in recent years with the continuing financing needs of expanding energy sector subsidies, power theft, rising losses incurred by state-owned enterprises, and high expenditures for security. Pakistan's (FBR collected) tax-to-GDP ratio remained between 8.5pc to 9.5pc in recent years, which is one of the lowest in the region and reflects structural imbalance. As a result, the country has relied largely on foreign inflows from the CSF and foreign remittances. Higher fiscal deficits and very limited foreign inflows during the past two years resulted in short-term domestic borrowings and soaring debt servicing costs. In order to widen the revenue base and increase the tax-to-GDP ratio, structural reforms are imperative as also urged by the IMF.
Through devolution of power, the fiscal performance of provinces has become of utmost importance in relation to the national fiscal outcomes because the provinces have assumed greater share of federal resources. The IMF has taken the assumption that these fiscal reforms will be enacted and, hence, Government revenues rise from Rs 3021.4 billion in 2013 to Rs 3834.1 billion in 2014. This ideal trend of the rise in government tax revenue may result in augmenting the Tax-to-GDP ratio to 15pc in 2015.
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