Subsidy slash will increase inflation in Pakistan: IMF

ISLAMABAD: International Monetary Fund has issued new World Economic Outlook (WEO) report.

The report says that Pakistan’s newly elected government has a mandate to tackle large fiscal and external deficits, which will initially weigh on growth.

However, reforms in the energy sector, combined with relatively stable worker remittances and agricultural production and support from international and bilateral donors, are expected to support growth over the medium term.

In Pakistan, past currency depreciation and reduced energy subsidies will likely result in higher inflation, the report says.

The report added that domestic and regional factors are the main sources of risks, which remain tilted to the downside.

Setbacks in political transitions and continued social and security tensions could delay a return of confidence and reforms. Downside risks to growth in the euro area and the GCC economies also present risks for the region’s oil importers, through spillovers on tourism, trade, and remittances.

Limited exposure to international capital markets should limit risks of a sudden stop in capital inflows for most countries. Still, with limited exchange rate flexibility, tighter global monetary conditions could result in higher domestic interest rates, which would dampen growth.

In an environment of increased risks due to regional tensions and heightened political uncertainty, policy goals are threefold: (1) creating jobs, (2) making inroads into fiscal consolidation, and (3) embarking on structural reforms.

High and rising unemployment calls for an urgent focus on job creation. Delays in the revival of private investment suggest the need for the government to play a key role in shoring up economic activity over the near term.

With limited room for widening fiscal deficits, spending on broad-based subsidies needs to be reoriented toward growth-enhancing public investment, while improving protection of vulnerable groups through well-targeted social assistance.

External partners could provide additional financing based on the existence of adequate policy frameworks.

With concerns about debt sustainability rising and fiscal and external buffers eroded, most countries need to start putting their fiscal house in order.

That said, in some cases, there may be scope for phasing the fiscal adjustment to limit its impact on economic activity in the short run. A credible medium-term fiscal consolidation strategy would be needed to ensure continued willingness of domestic and foreign investors to provide adequate financing.

In some cases, greater exchange rate flexibility can also help to soften the short-term impact of fiscal consolidation on growth and help to rebuild international reserves.

A bold structural reform agenda is essential for propelling private sector activity and fostering a more dynamic, competitive, and inclusive economy.

Reforms need to focus on a multitude of areas, including improving business regulation and governance, expanding access of businesses and consumers to finance, and increasing the flexibility of labor and product markets while protecting the vulnerable through well-targeted social assistance. Early steps in these areas can help to signal governments’ commitment to reforms and improve confidence.

Delays in economic recovery and rising unemployment underscore the urgency of policy reforms.

Early progress across all three priority areas-supported by the international community through scaled-up financing, enhanced access, and technical assistance-is essential to start achieving the much-awaited dividends from the recent economic and political transitions. NNI