IMF appreciates recovery in Pakistan’s economy

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ISLAMABAD: The International Monetary Fund has acknowledged that Pakistan’s reform program is on track and already producing results.
According to a press release of Finance Ministry Sunday, the IMF in its latest report conceded that the business climate has improved, and market confidence is returning.
On the completion of first review of Pakistan’s economic performance, IMF has acknowledged that Pakistan’s reform program is on track and already producing results. Decisive policy implementation has started to address the deep-seated problems of Pakistan’s economy and to reverse its large imbalances, preserving financial stability.
The report acknowledges that the business climate has improved, and market confidence is returning. IMF further adds in its assessment that the Government recognizes that structural reforms, especially in SoE sector are key to revive economic activity and growth.
IMF has released SDR 328 million (about $ 452.4 million), bringing total disbursements to SDR 1,044 million (approx $1.45 billion).
The report has confirmed that End-September performance criteria (PCs) were observed with wide margins. These include: Zero budgetary borrowing from SBP; Primary budget deficit ceiling; Ceiling on government guarantees; Zero external public payment arrears; and SBP net
international reserves (NIR), net domestic assets (NDA), and swaps/forwards targets all met.
In addition to above, all structural benchmarks (SBs) for end-September, except the SB on AML/CFT, were completed.
With regard to inflation outlook, IMF has lowered Inflation projection for FY20 to 11.8%, down from 13% earlier on account of this fact that the administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand. Thereafter, inflation is expected to converge to 5-7%.
The report confirms that inflation has been started to stabilize, along with core inflation, and the SBP stance is appropriate (no need for further rate hikes).
However, we are of the view that we will do much better than IMF projection. As inflation during Jul-Nov was 10.8% and with measures taken we target to bring inflation down to 5% over the medium term.
With regard to the external sector, significant improvement has been witnessed. Overall, Current Account Deficit (CAD) shrunk by almost two-thirds (74%) in the Q1 FY 20 compared to the same period of FY 2019. CAD is projected to decline to 2.4% of GDP in FY20 (4.9%), which is
lower than earlier IMF forecasts of 2.6%.
Total imports fell by 23% y-o-y in Q1 of FY2020, but imports of machinery and equipment were more resilient, rising about 2 % y-o-y. Exports are showing some sign of recovery, up 2% y-o-y for the same period with 17% volume growth, mainly driven by food and textiles.
The report states that transition to a market determined exchange rate has allowed the rupee to find its new equilibrium quickly, thereby, successfully correcting the ‘exchange rate overvaluation’ of the last 5 years.
The report has also acknowledged strong Fiscal performance in the First Quarter of FY2020 while stating Primary surplus of 0.6% of GDP and an overall deficit of 0.6% of GDP, about 1% of GDP better than programmed.
In addition, Tax revenue growth was in double-digits (net of refunds) even though customs receipts and other external sector related taxes have suffered due to import compression.
Key Concessions won by Government includes: Ceiling on NDA of SBP (Performance benchmark) has been enhanced to Rs 9.1 trn (8.7), an increase of Rs 339bn in FY20; This is positive for growth and will be utilized for concessional financing for the export industry; Ceiling on government guarantees has been enhanced to Rs 1.8trn (1.6), an increase of Rs 252 bn in FY20; This is positive for growth and will allow government to settle the outstanding stock of circular debt; Floor on FBR tax collections for FY20 has been revised lower to Rs 5.2trn (5.5), due to strong improvement in non-tax revenue; During H1 Fy20, government non-tax revenue collection has hit Rs 878 bn which is 75% of full year budgeted collection of Rs 1.16 trn; and This is positive for growth and will ease the burden on public and businesses.
Current Economic Performance: Pakistan economy has witnessed significant improvements in recent months as evidenced from the performance of key economic indicators mentioned below:
Exchange rate is stable for 5 months, Rupee appreciated by 3.2% (Rs/$ 160.1 to 154.89)(20th Dec, 2019), Stock Exchange 100-Index up 20.1 percent since 1st July, 2019 (33,996) to 40,832(20th Dec, 2019) , SBP FX Reserves increase to $ 10.8bn (13th Dec, 2019), from 7.2bn (June 2019), Ease of Doing index up by 28 points (108/190) and World Bank rank Pakistan in Top 10 improvers.
After 4 years of outflow, total foreign portfolio investment up $ 1.2 bn during Jul-Nov FY20 (-330mn last year). FDI increased to 850mn (477.3mn last year)? 78.1%. Total foreign investment reached to $2 Bn (last year147mn).
Similarly, Incorporation of Companies increased 25.8 % (7,177 from 5,707) during Jul-Nov FY2020. -NNI

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