Pakistan (Officially the Islamic Republic of Pakistan) is a sovereign country in South Asia and has a population exceeding 180 million; it is the world’s sixth most populous country.


On the 4th September 2013 the Executive Board of the IMF concluded the Article IV discussion with Pakistan following which they approved a three year arrangement under the Extended Fund Facility to support structural reform and growth.

GDP growth has averaged only 3 percent over the past five years and this is insufficient to improve living standards or to absorb the growing labour force. Growth has been seriously impeded by sever electricity supply problems, a concerning security situation, the presence of loss making public enterprises, a poor business climate and a distorted trade regime.


In recent months headline inflation has fallen sharply but underlying pressures remain. (In 2012 it was around 1 percent, figures not available for 2013)

External position

This has weakened significantly with Central Bank reserves declining to USD6 billion (this is less than 1.5 months imports) as at end June 2013.


The Rupee depreciated around 5 percent against the USD in the Fiscal Year 2012/13 (July-June) which has left the real effective exchange rate unchanged.

Fiscal Position

The 2012/13 fiscal defect (excluding grants) is estimated to be 8 percent of GDP. This is well above the original budget target of 4.7 percent of GDP due to slippages on both revenues and expenditure.

Inadequate tax collections have been the main reason for the revenue shortfall accompanied by a slowdown in economic activity. Higher energy subsides have been the major drivers of higher expenditures including the clearance of power sector arrears. Another factor has been the fall in provincial surplus’s that had been expected in the budget.

As a result of very low external financing, the deficit has a major dependence on domestic finance




Monetary Policy

This continues to be accommodative and should lift weak private investment and growth, in the light of falling headline inflation.

Interest rates were cut by a cumulative 300 basis points to 9 percent at the same time direct financing of the large fiscal deficit continues to drive growth in monetary aggregates. The accommodative policy however has not proven to be a success in terms of private sector stimulus as private sector credit shrank in real terms.

The Financial System

This is dominated by banks with relatively healthy capital levels and liquidity indicators continue to be boosted by large holdings of government securities. Non-performing loans are high at 14.7 percent end of March 2013 but few banks have fallen below minimum capital adequacy requirements


Pakistan’s economic vulnerabilities and crisis risks are high due to subpar growth and at the same time unsustainable fiscal balance of payments positions remain high.

In light of this, the authorities are instigating an ambitious economic program aimed at reversing the current mix of large scale fiscal deficits, accommodative monetary policy and low reserve coverage and at the same timer foster sustained and inclusive growth. The authorities are cognisant that short term measures must be complemented by significant reforms in:

                      fiscal management

                      the monetary policy framework & financial markets

                      the energy sector

                      public sector enterprises

                      the business climate

                      Trade policy

Consolidation is required to ensure fiscal stability. The 2013/14 federal budget has represented an important initial step, however a more efficient and equitable tax system is needed with a major increase in the tax-to-GDP ratio, a key for creation of social; and investment spending while lowering the deficit.

There is a need for monetary and exchange rate policies geared to rebuilding external buffers and to maintain price stability over time. The IMF have stressed the need to cease direct lending to the government and the importance of monetary policy independence which will contribute to paving the way for improved price stability.

Continued financial sector stability and steps to deepen financial markets will contribute to boosting economic growth. The IMF considers risks to the banking sector are manageable; they however have encouraged the Pakistani authorities to quickly address the undercapitalization of banks and to closely monitor non-performing loans.

A new energy policy is to be introduced which will be geared towards addressing long standing problems that have created the most critical constraints on growth and generated large fiscal costs. The IMF is encouraging the Pakistani authorities to work closely with donors to secure broadbased support for continued strong implementation of the energy sector strategy. The IMF have also called on the Pakistani authorities to liberalize the trade regime, to restructure or privatize the public sector enterprises and improve the business environment to reduce rent seeking behaviour and to work towards greater foreign investment and domestic productive investment.

The IMF have noted that protecting the most vulnerable from the impact of fiscal consolidation and price adjustments is a priority and have commended the Pakistani authorities for the firm commitment they have made to boosting targeted income support programs and encouraging the gradual expansion and coverage and benefits as savings from energy tariff adjustments and fiscal space are realized.

There are risks to these programs which come from delicate security situation, continued deterioration in the external environment and potential constraints in a legal administrative or technical capacity and resistance from vested interests to the reforms.

Source : Selected data from the IMF and Pakistani authorities


John Brooks MECsT

Trade Economist

Trade - Supply Chain Specialist

The Auspacific Institute

2 October 2013.

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