ISLAMABAD: The Asian Development Bank has feared that IMF’s new programme is at risk, as most of the required reforms have political and governance dimensions which posed formidable barriers in the past.
“Pakistan is at a turning point where political will determines whether or not the future holds further deterioration or enhanced growth prospects,” according to the ‘Asian Development Outlook (ADO) 2013’, the annual publication released on Wednesday.
Explaining the barriers, the report says that these barriers stifle reforms that would replace Pakistan’s woefully inadequate revenue base with one capable of meeting the country’s needs; limit the implementation of reforms in the energy sector; and hinder appropriate restructuring, corporatization, and privatisation of state-owned enterprises. “If these barriers remain, Pakistan will not have the active and vibrant private sector that it needs for growth and job creation,” ADB warns in its report. The report points out that lower growth in fiscal year 2014, the first year of the IMF programme, is expected to combine with some nominal exchange rate depreciation (as seen by 8.7 per cent on Sept 24), and expected inflows from remittances and the Coalition Support Fund to hold the current account deficit to 0.8pc of GDP in fiscal year 2014, slightly larger than the IMF projections reflecting ADO’s smaller compression of growth from fiscal contraction.
The IMF programme envisages improved capital and financial account net inflows stemming in part from higher programme financing from official creditors mobilised by the IMF.
Over the programme period, gross official reserves are expected to strengthen to $18bn, or more than three months of import cover.
The ADB report went on to say that structural reforms mandated under the programme are critical to stabilising the economy and improving its growth prospects. The unrelenting crisis in the power sector has taken an estimated two percentage points off growth annually, deepen the investment drought, caused export to stagnate, and undermined business confidence.
Beyond the energy sector, reform extends to restructuring 65 public enterprises, aiming to privatise many of them. The completion and implementation of restructuring plans for PS, PIA and Pakistan Railways will eliminate the need for sustained support.
It stated that new legislation is needed to remedy gaps and inconsistencies in the regulatory and supervisory frameworks governing the financial sector, including a draft securities bill to strengthen the supervisory and enforcement powers of the regulator and amendments to the SECP to act as an integrated regulator.
ADO also points out that the ongoing consultations on a new bankruptcy law aim to improve the legal framework for rehabilitating viable enterprises and liquidating those determined not to be viable.
A new draft law is expected for the enactment by the end of December 2015.
The ministry of finance and the State Bank plan to introduce deposit insurance to strengthen the long-term stability of the banking system. It would be managed by a deposit protection fund established as a subsidiary of the SBP.
According to the report, the IMF’s baseline projections for fiscal year 2014 differed from those announced in the context of the fiscal year 2014 budget, as they projected lower growth at 3.3pc, instead of 4.4pc as in the budget; a larger deficit at 8.1pc of GDP rather than at 6.3pc; and a sharp reduction in reserves to well short of one month of import cover.
Against this backdrop, the IMF forecasts growth at only 2.5pc for fiscal year 2014, reflecting the impact of the substantial fiscal consolidation planned for the year.
ADO projections, however, use a somewhat smaller multiplier for fiscal compression on growth, which projects GDP up by 3pc in fiscal year 2014.