Pakistan cleared IMF’s 2nd Extended Fund Facility (EFF) review with a scorecard citing a ‘mostly satisfactory’ performance on reform implementation and ‘commendable progress’ on stabilizing the economy.
– IMF recognized that economic developments have been slightly better than expected, flagging (1) the revival in GDP growth (FY14E: 3.1%, FY15E: 3.7%) and (2) that 2Q fiscal deficit target was met with a margin implying room for a pick-up in capital spending in 2HFY14.
–That said, the undercurrent of caution was visible where the IMF (1) flagged that macro risks were tilted towards the downside; (2) continued to stress on significant risks to the Balance of Payments (BoP); and (3) voiced caution on writing off the inflation risk.
–Resultantly, the fund recommended both further tightening of monetary policy rate and a more flexible exchange rate. The same is unlikely to excite the equity market which was gearing up for a May 2014 rate cut.
Pakistan gets IMF’s nod with ‘mostly positive’ performance
Pakistan cleared IMF’s 2nd review of its US$6.78bn Extended Fund Facility (EFF), focused on December 2013 performance targets, with a scorecard citing a ‘mostly satisfactory’ performance on reform implementation and ‘commendable progress’ on stabilizing the economy. While there were slippages on two performance criteria, i.e. (1) the ceiling on State Bank of Pakistan’s (SBP) net swap position, and (2) the ceiling on government borrowing from SBP, the fund granted waivers on the same given recent corrective measures taken by SBP which indicate that March 2014 targets on both these fronts are likely to be met. Resultantly, the IMF also released the 3rd EFF tranche of ~US$556mn (program start to date amount disbursed: US$1.657bn). Meanwhile, note that amidst an overall satisfactory appraisal, the Fund did end up delivering more caveats and “must-dos” than the country’s economic managers may have hoped for after their strong economic showing (PKR exchange rate / inflation / FX reserve build-up) in Feb-Mar 2014.
Better than expected progress in some areas…
The IMF recognized that economic developments, since the program started in September 2013, have been somewhat better than expected, flagging the revival in GDP growth, where FY14E outlook has been lifted to 3.1% on the back of better manufacturing sector growth while FY15E GDP growth is expected to accelerate to 3.7%. In the same vein, the fund sounded its comfort on the fiscal deficit where 2Q target was met with a margin implying room for a pick-up in capital spending in 2HFY14. The IMF also sounded its confidence on the missed performance criterion being met in the March 2014 review.
…but ‘more is needed’ mantra remains firmly in place
That said, the undercurrent of caution was visible throughout the review where the IMF (1) flagged that macro risks were tilted towards the downside; (2) continued to stress on significant risks to the Balance of Payments (BoP) where even in the case of full implementation of the government’s ‘ambitious’ flows target, Pak FX reserves will remain very tight for another 2 quarters; (3) flagged that the pace of efforts to broaden the tax base and improve tax administration need to be stepped up; and (4) voiced caution on writing off the inflation risk, where despite recent moderation to 7.9% in February 2014, the IMF expects CPI inflation to end FY14 around the 10% mark before falling to ~7% in FY15E. Resultantly, the IMF was categorical in its view that ‘a tight monetary stance remains important to help accumulate reserves and to contain inflationary pressures’ and recommended both further tightening of monetary policy rate and a more flexible exchange rate. The same is unlikely to excite the equity market, which was largely geared up for an interest rate cut in the upcoming May 2014 Monetary Policy Statement (MPS). While SBP has agreed to consider additional policy rate adjustments if needed, given our more-benign inflation outlook, we maintain our view of unchanged interest rate through to end FY14 (June 2014).