AKD Securities Limited – Pakistan Economy: IMF sixth Review Report

Karachi, April 08, 2015 (PPI-OT): The GoP has received a nod for its performance on the EFF-IMF program so far and achieving economic stability, in the Fund’s recently released report on the sixth review. Keeping these developments in mind the IMF revised its inflation target for FY15 from 7.5%YoY to 5.5%YoY, accounting for the decline in int’l oil prices, with inflation projected to remain around 5%YoY till FY20 (keeping oil prices stable at current level).

That said, fiscal consolidation persists to be a sensitive area, with downward revisions in the indicative target for FBR revenue collection witnessed on the back of: 1) legal challenges in the implementation of reforms and 2) low oil price levels bringing down revenue collection (decrease in sales tax). After meeting all targets for Dec’14 end, the Fund has revised upwards targets for Net International Reserve (NIR) and the SBP’s Net Domestic Assets (NDA). New Structural reforms pertaining to fiscal improvements in addition to the SBP’s autonomy have also been introduced in the review.
Pakistan on its way to progress: The recently released IMF report has applauded Pakistan’s performance where the GoP managed to meet all targets for Dec’14 end, leading to the release of US$501.4mn at the start of Apr’15. While maintaining FY15 GDP growth target at 4.3%, the Fund revised its inflation target from 7.5%YoY to 5.5%YoY, accounting for the decline in int’l oil prices.

Benefits of low oil prices are also expected to spill over to the CA, with the fund projecting a US$2.8bn reduction in the import bill for FY15. Major issues considered in the review meeting included: 1) export competitiveness, 2) revenue expansion and tax administration and 3) monetary and financial stability. On the negative side, Pakistan fell short of its indicative target for FBR revenues for 1HFY15 by PkR24bn. In this regard, any widening of this gap may lead to fiscal deficit going above the IMF prescribed level.

The way forward: Reversing the previous trend of downward revisions, the IMF has upward revised NIR targets by US$500mn for Mar’15 end and by US$1bn Jun’15 end reviews. In addition to this, target for the SBP’s NDA has been contracted by PkR25bn, which now sits at US$2.34tn for Mar’15 end and US$2.27bn for Jun’15 end. AKD Securities Limited expects the GoP to comfortably meet the targets within the backdrop of US$777mn under CSF and the US$501mn IMF tranche.

Fiscal performance: Pakistan missed its indicative target for FBR revenues for Dec’14 end owing to: 1) legal challenges in implementation of tax reforms and 2) low oil prices affecting sales tax collection, which has led to revision for the Mar’15 end target to PkR1.84tn from PkR1.88tn, and Jun’15 end target to PkR2.69tn from PkR2.75tn. However, Fiscal deficit targets have been maintained at previous levels (end-Jun’15 target at 4.9% of GDP). That said, with provisional figures for 9MFY15 FBR tax collection at PkR1.76tn AKD Securities Limited flags risk to Pakistan’s ability to meet fiscal targets in the next review.