PAKISTAN UNDER IMF SUPERVISION: PROSPECTS OF REVIVAL OF ECONOMY.

• Author: Kazmi, Shabbir H.

Byline: SHABBIR H. KAZMI

As hopes are building for easing of lockdown, which should not continue for indefinite period, it is necessary to evaluate the prevailing situation and come up with our own homegrown plan. One of the positive points is, this time International Monetary Fund (IMF) and other multilateral financial institutions are more than willing to extend help to every country, Pakistan is certainly not an exception. The latest assessment of IMF of Pakistan's economy lays out immediate economic fallout from COVID-19, as well as provides initial guidance on program modalities once conditions become normal.

It is necessary to examine the key takeaways. The lender of last resort expects the economy to contract by 1.5%YoY in FY20 as against an estimate of 2.4%YoY growth previously. It is for the first time ever since the 1950s primarily due to voluntary and government mandated social distancing measures to contain the spread of the virus, with accompanying impact on the fiscal (negative) and current account (positive) of 2% of GDP and 0.6% of GDP, respectively.

Going forward, fiscal and energy chain will remain key focus areas under the EFF, with the fund looking for a massive additional revenue euort of 3.3% of GDP in FY21 while projecting fiscal deficit to decline to 6.5% of GDP as against 9.2% of GDP projected for FY20. While the fund's inflation estimate (year-end) of 9.8%YoY and overall tone imply limited room for further cuts, particularly after the latest 200bps reduction in interest rate, analysts do not rule out further monetary easing, given the high level of uncertainty, benign inflationary backdrop and improved external account position following G20 debt relief and funding commitments by multilateral financial institutions.

The Fund estimates an incremental fiscal cost of 2% of GDP from COVID-19 in FY20, with a hit from tax revenue loss and elevated social spending, partially ouset by a cut in development spending and savings from debt servicing. The IMF now expects fiscal deficit of 9.2% (2.7% of GDP) as against 7.2% (0.7% of GDP) previously. While FY21 estimates may later be subject to revision considering the high level of uncertainty at this stage, the same provides initial guidance on type and scale of potential fiscal adjustment under the EFF.

The IMF looks for generation of additional revenue of Rs1.5 trillion (3.3% of GDP) in FY21 a whopping 34% increase as compared to FY20. On the expenditure side, FY21 estimates...