IMF review: Progress in stabilising economy, but more needs to be done

Pakistan, IMF agree to consolidate Rs290b in next fiscal year by levying Rs220b in new taxes, reducing power subsidy.

ISLAMABAD: Pakistan and International Monetary Fund on Saturday announced an agreement on next year’s budget framework that envisages fiscal consolidations of Rs290 billion that will be achieved by levying Rs220 billion new taxes and reducing power subsidies, even as the financial body noted that the economy was largely on track at the end of the third review.

“For next year we have agreed to reduce fiscal deficit to 4.8% of Gross Domestic Product from this year’s deficit of 5.8% of the GDP”, said Jeffery Franks, the IMF’s Mission Chief to Pakistan while addressing a press conference along with Finance Minister Ishaq Dar. To bridge the deficit the government will borrow Rs1.4 trillion from domestic and international markets.

A further reduction of 1% of GDP (Rs292 billion) in budget deficit –gap between national income and expenditures, indicates the IMF’s preference for economic stabilisation over economic growth, according to independent economists. It will be the second year of fiscal stabilisation after steep adjustments equal to 2.2% of the GDP were implemented in the outgoing fiscal year.

“The mission and the authorities agreed on the key revenue and expenditure measures to achieve a further reduction in the fiscal deficit in fiscal year 2014-15”, said Franks. The agreement came just weeks before the federal government is going to present its second budget in the Parliament.

“Pakistan has made progress in stabilising the economy but yet more needs to be done”, said Franks while saying that the IMF has increased its growth forecast for Pakistan to 3.3% from 3.1%, which is still lower than official target of over 4%.

Franks said reduction in budget deficit will be achieved by reducing power subsidies and increasing tax base by eliminating Statutory Regulatory Orders (SRO), coupled with other revenue measures. He, however, said next year’s budget will provide room for additional development spending. He said besides closing tax loopholes, the FBR must step up its efforts and improve enforcement to enhance revenues.

Franks said to lessen the impact of these measures on poor, both the IMF and Pakistan have agreed to increase monthly stipend under Benazir Income Support Programme in the new budget. The BISP beneficiaries get Rs1,200 per month stipend. Ishaq Dar said that BISP stipend will be increased equal to the raise given to the government employees, expected to be 10% for next year.

Dar said that the first phase of withdrawing tax exemptions will be implemented through Finance Bill 2014. He said import duties will also be lowered in three years, beginning from new financial year. On increase in power tariffs issue, he said the consumers of up to 200 units will be exempted from any further increase in tariffs. Dar clarified that reduction in power subsidies will also be achieved by reducing line losses and improving recovery. He said the government will not clear the circular debt, as the debt was piling up again due to less electricity bills recoveries. Dar said so far Rs232 billion power subsidies have been given.

Outgoing fiscal year

Dar and Franks announced successful completion of the third review of the $6.7 billion programme, paving way for the IMF’s Executive Board to consider approval of $550 million next loan tranche by next month.

The finance minister said during the current fiscal year the net IMF’s disbursement remained negative by $1 billion, as Islamabad will receive $2.2 billion fresh loans including upcoming tranche while it returned $3.2 billion.

Franks said the FBR’s revenue collection in this fiscal year will remain below the IMF projections. He said the government recognized an emerging revenue shortfall in April tax collection and committed to taking the necessary compensatory actions to assure attainment of the end-year deficit target.

Dar admitted that the FBR’s collection target has been downward revised to around Rs2.275 trillion. He said Rs70 billion further reduction in tax target was because of less collection of duties at import stage due to strengthening rupee. The Parliament had approved Rs2.475 trillion target, which was lowered down to Rs2.345 trillion in September last year.

Dar said despite lowering tax target, the government will achieve 5.8% of GDP budget deficit target by “better expenditure management” –a veiled reference to slashing development budget.

Franks said economic indicators were generally improving, with growth gaining momentum, external finance improving, and credit to the private sector rising. Franks said Pakistan’s programme was broadly on track and it met all end-March 2014 performance criteria with the exception of the target on Net Domestic Assets of the central bank, which was missed by a small margin.

However, the IMF remained concerned about increase in inflation rate. “The IMF mission urged the SBP to remain vigilant on recent inflationary pressures in their monetary policy decisions, while continuing their ambitious program to rebuild reserves”, said Franks. Inflation, which remained in single digits, stood at 9.2%.