IMF insists on reforms and policy changes

Estimating current year’s fiscal deficit at 7.5 per cent and external financing needs of ‘billions of dollars’, the International Monetary Fund linked the future funding for Pakistan on Friday to “broadest and deepest” political support for upfront economic reforms and policy changes to prove the government’s seriousness.

At the conclusion of negotiations with Pakistan, the IMF adviser for Middle East and Central Asia and IMF mission chief to Pakistan Jeffrey R. Franks said Pakistan had not formally requested so far for a new programme, but if it requested, the disbursements would follow prior policy actions for macroeconomic stabilisation.

This seemed to be a major departure from previous fund programmes under which successive governments used to get upfront disbursements for budgetary support before undertaking implementation of programme conditionalities, leading in most of the cases to premature termination of IMF programmes in the event of failures.

“Current policies need to be adjusted upfront to qualify for a new programme,” he said, adding that the IMF mission could support a new programme before its management and the executive board when right policies were there to prove that authorities had taken steps for macroeconomic stabilisation. To achieve this, he added, Pakistan needed to take a combination of steps in the power sector and fair enforcement of taxation measures to bring down fiscal deficit to three or 3.5 per cent of GDP in two-three years. A set of policies that could help the economy achieve that goal needed to be agreed upon, he said.

Inflation should also be seen to come down on a sustainable basis and reserves rise up to $15 billion. This would require a lot of macroeconomic adjustments through removal of bottlenecks.

“These bottlenecks include correcting energy sector, followed by restructuring of public sector entities, improving business climate, better bureaucracy and improved and simple tax system,” he said.

He argued that a major chunk of the economy was outside the tax net. Some of the areas he mentioned for bringing into fair and transparent tax system included agriculture, services, retail business and withdrawal of exemptions allowed by different SROs and other legal or illegal instruments.

The energy sector should be starting point for upfront policy adjustments for macroeconomic stabilisation through a combination of enforcement, technical efficiency, controlling theft, improving generation companies and improved fuel mix coupled with supply side management through access to efficient equipment.

Even though he did not say it in so many words, the crux of his interaction with journalists appeared to be that a new loan programme would most probably materialise during the tenure of interim government to be put in place with consensus by major political parties.

The size of the programme could range from $4bn to $5bn as the IMF senior official noted “a substantial gap in billions of dollars” in financing external account and need to boost capital flows either through private or public sources even though current account deficit was not large.

He ruled out restructuring of its existing loan, saying the IMF rules did not allow restructuring of loan or postponement of repayment obligations.

He hinted at entering into an Extended Fund Facility (EFF) programme, at the time of Pakistan’s choice, spanning at least over three years with tough policy conditions and relatively high interest rates.

Mr Franks who was assisted by Mansoor Dailami, the resident representative for Pakistan, said the conclusion of policy discussion with the authorities ahead of schedule did not mean failure, adding the two sides were able to complete the task quickly.

He said the dialogue process would continue and he was expected to return soon to interact with political parties, including the opposition.

He said the two sides discussed policies and actions Pakistan should follow to stabilise macroeconomic conditions ‘with or without IMF programme’. There are some hefty repayments due, including to the IMF, the forecast for current account deficit standing at 0.7pc of GDP and GDP growth rate estimated at 3.5pc of GDP.

He said the IMF forecast budget deficit for the current year at about 7.5pc of GDP or Rs1.624 trillion. External financing was the real issue, he said, adding that foreign exchange reserves lower than a certain limit would lead to drawdown on SBP reserves.

The current account deficit was small but there were not sufficient resources to finance it, he said.

He said Pakistan should have reserved adequacy ratio for three months of imports and hence the desirable level for foreign exchange reserves should be around $14-15 billion. “Pakistan needs to adjust economic policies to reduce the gap,” and strengthen it with lower fiscal deficit and enabling monetary policy, he siad.

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