The IMF has agreed to reduce the FBR’s tax collection target to Rs2.691 trillion against the original target of Rs2.810 trillion. PHOTO: PID
It was not immediately clear whether the government will cut Public Sector Development Programme by the same amount or the budget deficit ceiling of 4.9% of the GDP will be relaxed.
Finance Minister Ishaq Dar and outgoing IMF Mission chief to Islamabad Jeffrey Franks announced successful conclusion of the sixth review of the economy on Thursday, despite the government’s failure in introducing energy and taxation reforms and giving autonomy to the State Bank of Pakistan (SBP).
"The IMF has agreed to reduce the FBR’s tax collection target to Rs2.691 trillion against the original target of Rs2.810 trillion," said Dar.
He claimed that FBR’s performance was marred by a reduction in petroleum products prices and lower inflation that affected revenue collection. But, the finance minister argued that this had in turn helped to contain the current account deficit in the balance of payments.
However, Dar’s assertion appeared faulty as the government claimed it would sustain Rs68 billion shortfall in revenues, out of which it will recover Rs28 billion, after it increased sales tax on all petroleum products to 27% against the standard rate of 17%.
Since beginning of the current fiscal year, independent economists have criticised the government for setting an unrealistic target of Rs2.810 trillion. Despite lowering the target to Rs2.691 trillion, officials in the FBR and economists are skeptic of the machinery’s ability to achieve this target.
Franks said both sides had agreed on steps to boost FBR revenues going forward, however, he did not explain what these new steps will be.
The IMF mission chief said that measures to reduce tax loopholes had borne fruit but lower FBR revenues means more efforts were needed to achieve targets of Rs1.195 trillion for the first half of the fiscal year.
On the other hand, Dar claimed that the government had achieved all the performance criteria, indicative targets earmarked in the programme and met the structural benchmarks.
Franks argued that while there was overall improvement in Pakistan’s economy all end-December performance criteria were met invalidating need for waivers, efforts should be made towards building up foreign exchange reserves. He also called for more efforts to afford more autonomy to the SBP.
Dar said successful completion of negotiations will enable the IMF to go to their board for the release of seventh tranche of about $518 million.
He claimed that completion of the sixth review was indicative of government’s commitment in implementing structural reforms in the areas of taxation, energy, monetary and financial sectors and public sector enterprises.
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Upheaval Inevitable Germany's Finance Ministry has also registered with concern that the euro's role as a reserve currency is suffering as a result of monetary policy decisions made by the ECB. Around one-fifth of global currency reserves are currently held in euros, but that share used to be considerably larger. If the ECB opens up the floodgates for additional quantitative easing, they fear that share could fall even further. Central banks normally sell their reserves in a weak currency in order to limit their losses. But if they push their euros onto the market, it will further weaken the common currency, triggering a self-perpetuating downward spiral. For months, the Americans and the IMF have been calling on the Europeans to implement precisely the monetary policy that is now making the euro weaker. They will now have to accept the increasing trade imbalance as the logical consequence of this move. "You can't have both -- a loose monetary policy and at the same time a reduction in imbalances," one government expert in Berlin said. Are Europe and America Trapped? Efforts by the Federal Reserve to become the first major central bank to reverse its quantitative easing illustrated just how risky the flood of money can be. A year and a half ago, the Fed began suggesting that it would end its loose monetary little by little. The statements led to a reverse in capital flows in large parts of the world, with investors pulling money out of developing nations and investing it in the US. In countries like India, the markets fell sharply and currencies were strained. Quiet has since returned to the markets, but the Fed still hasn't raised its interest rates. If the value of the dollar relative to the euro continues to increase, the Fed may feel forced to take countermeasures. "As long as things are going decently with the US economy, people will accept appreciation of the dollar," says economist Mayer. "But if the mood shifts at some point, the exchange rate will become a political issue." Accusations of currency manipulation, he says, would quickly follow. In that event, the US Congress has the means of imposing punitive measures against countries or entities deemed guilty of such manipulations. And, as the case of China has shown, US lawmakers aren't afraid of threatening to use those powers.
When Weakness Becomes a Problem At that point, the euro would reach parity with the dollar -- a level at which the disadvantages of a weak euro could no longer be overlooked. Everything that is traded in dollars would then become palpably more expensive, especially commodities. If oil prices hadn't declined so dramatically in recent months, the cost per liter of diesel would be €1.50 today due to the weaker European currency. But at the moment, it costs €1.10 on average. Investments made by German companies in the dollar zone also get more expensive when the euro's value slips. German chemicals giant BASF is currently planning to spend €5 billion to expand its North American business between 2014 and 2018. The chemical company says it still intends to stick with its plans. "Short-term currency fluctuations have no influence on our investment decisions," BASF officials state. The question is how long the euro will remain weak. Potentially even more important is the psychological effect devaluation has. A weak euro can give companies a false sense of security. "This kind of thing only provides a temporary boost," warns BGA President Börner. "You can't create any prosperity through devaluation," he says. "It's window dressing." Is It Contagious? Last week's decision by the Swiss central bank to unpeg the franc from the euro illustrated just how dangerous markets can be for banks and investors alike. Swiss stock prices dropped sharply and banks, funds and currency traders around the world -- but also many private individuals and German municipalities -- who had invested in Swiss francs suffered painful losses. The move even drove one major US hedge fund out of business. Officials within Germany's Finance Ministry are already concerned that the currency turbulence could prove contagious and hit countries neighboring the euro zone. Like Switzerland, a few other countries have pegged their currencies to the euro exchange rate, and they too may now feel the pinch of appreciation pressures. This is especially true of Denmark and Poland, which could become the next focus of speculators. The Danish crown and the Polish zloty are more or less pegged to the euro exchange rate. Central bank officials in both countries almost slavishly follow each move made by the ECB in order to ensure their currency values remain stable. But it's an arrangement that will be thrown into jeopardy if the ECB now starts purchasing large quantities of government bonds. In order to prevent speculation against the crown, the Danish central bank recently lowered its key interest rate by 0.15 percent to 0.5 percent.
Pros Outweigh Cons -- For Now Nevertheless, the downward trend in the euro's value and oil prices has the potential to create new problems for the German government in the foreseeable future, particularly in its relations with partner countries and with international organizations like the International Monetary Fund. They've long complained about Germany's growing current account surpluses. The imbalance threatens the recovery of euro-zone crisis countries and the global economy because Germany imports too little. Trade Imbalance At the same time, it is unlikely that the measures announced last week will restore inflation to the ECB's target rate of 2 percent. "Studies show that a low euro exchange rate has little influence on inflation," says Ansgar Belke, an economics professor at the University of Duisburg-Essen. For the time being, the focus remains primarily on advantages the weak euro has for the economy. The general rule of thumb is that a devaluation of 5 percent will translate to additional growth of 0.3 percentage points in the euro zone. But what side effects will it have? And at what point might it get dangerous? "At the moment, the situation is still relaxed," says Carl Martin Welcker, the CEO of the Kölner Schütte, the global market leader in grinding machines and multi-spindle automatic lathes and one of the medium-sized businesses that make up the backbone of the German economy. In light of the political situation, Welcker said he considers the depreciation of the euro to be an appropriate move, but says people need to keep an eye on developments. "If the euro were to lose another 15 percent in value, then things would be quite different," he said.
Parity with Dollar? But Draghi's policy also has inherent perils. By intervening in the exchange rate mechanisms, the EU is creating unfair advantages for itself globally at the expense of other countries. Those countries surely won't be pleased and are likely to respond by devaluating their own currencies. Ultimately, there can only be losers in such a contest. It will be "interesting to see how the Japanese follow up at this point" -- as well as the US -- Gary Cohn, president of investment bank Goldman Sachs, said at Davos. The job became even easier the more the mark gained ground against the dollar, the British pound and the Italian lira. It slowly came to be seen as a hard currency and ultimately became the world's second most popular reserve currency behind the US dollar. The strong deutsche mark also turned Germany into a nation of travelers. Now, though, Germans are having to adapt to a new reality. Rather than fighting for a strong currency as the Bundesbank used to do, the ECB is weaking the euro.
The Perils of a Weak Euro SPIEGEL January 28, 2015 The concern could be felt everywhere at this year's World Economic Forum in Davos, the annual meeting of the rich and powerful. Would the major central banks in the United States, Europe and Asia succeed in stabilizing the wobbling global economy? Or have the central bankers long since become risk factors themselves? The question was everywhere at the forum, being addressed by experts at the lecturns and by participants in the hallways. "It's important for the international community to work together to avoid currency wars which no one can win," Min Zhu, deputy managing director of the IMF, told the conference. Yet last Thursday's decision by the European Central Bank to purchase €60 billion ($68 billion) a month in government bonds through September 2015 has increased the threat of exactly that kind of monetary conflict. It will further flood the markets with liquidity and will continue to apply downward pressure on the value of the common currency. A weak euro, of course, is precisely what ECB President Mario Draghi wants. It makes exports to other currency areas cheaper, thereby increasing the competitiveness of euro-zone countries. At the same time, it increases the price of imports, thus reducing the threat of deflation.
The government will say forex reserves have increased. In reality IMF releases the tranches so that we may off their debt from the previous IMF agreement. They cannot let us default.