IMF stresses need for 'contingency plan' to face various risks

ISLAMABAD (November 14 2002) : IMF has cautioned the economic managers against making loud claims regarding future projections of the country's economic health, saying that they should not be overly optimistic about expected outcomes, and warned them of the vulnerability of the outlook to various risks, adding that to deal with any such eventuality Finance Ministry must have a 'contingency plan'.

IMF has argued that, given the modest growth performance of the late 1990s medium-term projections should be based on cautious growth assumptions. The economic managers have shared with IMF a comprehensive draft of anti-corruption strategy to be discussed by the Cabinet shortly.

The baseline projections imply a pronounced structural break in economic and financial outcomes compared to the 1990s, in particular a significantly higher growth rate (about 5 percent on average, compared to 3.4 percent during the preceding years). Such a break could be achieved through governance and other reforms resulting in an acceleration of total factor productivity (TFP) growth by about 1 percentage point, and a modest increase in investment.

The IMF says that to the extent to which reforms would accelerate human capital growth and/or labour force participation, growth could also be higher (or fewer improvements in TFP may be needed). At the same time, the impact of the reforms may not be as pronounced as expected and some of it may bear fruit later than hoped for.

IMF maintains that another major risk is that the reform effort proves, once again, short-lived, as has happened so often in Pakistan's history. The economic managers of the country, however, are confident that reforms would be maintained, and told IMF that it should see future political structure as an opportunity to anchor reforms in a broader political consensus.

The economic managers were of the view that continued regional tensions were an important risk. The latter could manifest itself in different ways; higher defence expenditure if the stand-off with India is prolonged or escalates; acts of domestic terrorism deterring investors, real and/or perceived security concerns affecting export orders, insurance premia and other trading costs; and loss of confidence leading to pressures on the capital account.

They agreed with IMF that they needed to be ready with appropriate 'contingency measures' to deal with such risks.

The economic managers were of the view that current macroeconomic policies would remain appropriate to foster high growth, reduce vulnerability, and ensure public debt sustainability.

They underscored that these policies have already brought significant macroeconomic stability gains and increased the economy's resilience to shocks. With time and in a less disruptive economic context than last year's, these policies should help create enabling environment for private investment and activity as the driving force for growth and poverty reduction.

The economic managers recognise the need to diversify the export base, especially in the light of the prospective expiration of the multi-fibre agreement. They hoped to achieve this diversification through removing anti-export biases in trade policies and maintaining a competitive exchange rate, in certain cases complemented through sector-specific strategies.

They were encouraged by the results of the public debt sustainability exercise. Debt to GDP ratios is expected to decrease steadily, assuming that current reforms will continue to be implemented and have the intended impact within a relatively short time. Shocks of magnitudes similar to those experienced in the 1990s seem unlikely to trigger unsustainable debt dynamics. IMF stressed that a combination of such shocks could still result in instability and that the most important danger, which had so often materialised in Pakistan's history, was that the reform effort was not sustained over a sufficiently long period.

The economic managers stressed their commitment to pursue the implementation of their structural reform agenda, centred on improving governance at all levels of the government and the further liberalisation of the economy.

The most urgent task was reform of the public enterprise sector, as it accounts for a significant share in GDP and employment. Within this sector about 50 enterprises, many were on track for privatisation (banks, oil and gas enterprises, telecommunications, cement) and others currently required only limited budgetary support (steel and airline), within the context of ongoing restructuring operations that involved in some cases partial privatisation.

The bulk of direct budgetary support went to Wapda and KESC (about one percent of GDP in 2001/02) and IMF has stressed that for the two utilities the need to implement greater efficiency and accountability was the largest.

In the context of the preparing PRSP which is expected to be finalised by the new government, the economic managers stressed their willingness to deepen participation through consultation at provincial and district levels, strengthen mechanisms to measure and monitor poverty-related data and intermediate outcome indicators and improve the costing of reaching the social targets in the context of medium-term budgeting framework.

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