IMF seeks second generation reforms: To ensure transparency
By Ihtasham ul Haque
ISLAMABAD, Aug 24: The International Monetary Fund (IMF) review mission, now in Pakistan wants the government to undertake "the very difficult" second generation reforms in order to adequately address governance and transparency related issues.
It also seeks further de-regulation of the economy to protect property rights and to create investment friendly environment in the country.
"The government will have to give serious consideration to achieve the objectives of second generation reforms which are, of course, very difficult and need to be undertaken to further strengthen the overall economy," said IMF Director for Middle East and Central Asia Department Mohsin S Khan, who also covers South Asia.
Mr Khan told Dawn on Thursday that the first generation reforms, which included tax and trade issues, were easy but the second generation reforms were tough and will have to be undertaken very carefully.
"Pakistan also has to take institutional reforms, especially civil service reforms and judicial reforms, which require more attention of the government," he said.
Mr Khan, who is visiting Pakistan along with a six-member IMF review mission, said that local and foreign investors were facing constraints for establishing their businesses in the country.
One of the most important challenges facing the government was to achieve long-term seven per cent plus growth rate to alleviate poverty and to create new employment opportunities, he said.
Responding to a question, he said poverty had definitely declined in Pakistan over the last few years but needed to be further reduced by increasing social sector spending.
"There is no doubt in my mind that poverty has reduced in Pakistan but I cannot say whether this reduction is 10 percentage point as was being stated by the government," he said adding IMF did not have technical expertise to measure the extent of poverty reduction in Pakistan.
Growth was the central point, he said adding if the country achieved up to 8.3 per cent GDP growth during the last three years, then poverty has certainly reduced. "No one can disagree with the government's claim that poverty has reduced in Pakistan."
However, the IMF director noted that there was not an ideal distribution of wealth between the rich and the poor in Pakistan, while maximum number of people should benefit from the country's improved GDP growth rate.
Mr Khan favoured government's decision to continue extending subsidies to the power and agriculture sectors as the improved budgetary provisions could now allow offering some benefits to the people. He said subsidy on diesel and kerosene oil was meant to help the poor classes.
It was good to see that the government was not offering across the board subsidies and was only catering to the requirements of low income groups.
"Pakistan needs to invest more in human and physical capital and the long-term fixed investment will have to be on education," the IMF director for Middle East and Central Asia said.
He expressed the hope that inflation will come down, which he thought to be around 7.5 per cent. That was not an encouraging situation.
"Some attention will have to be paid on further reducing inflation in Pakistan," he said adding that although it was not in the double digit as was experienced during 2005-06 but was coming down very slowly.
He said that Pakistan's current account deficit at $5.5 billion, was likely to be $6-7 billion during the current financial year.
But he did not see any problem over the issue because of the ongoing privatisation programme, increased foreign direct investment (FDI) and the government's foreign borrowings.
"This current account deficit seems to be the same, which was seen last year and the government was in a position to finance it," he added.
Mr. Khan said the current account deficit should not pose any major risk to the government. "But our policy advice would be to the government to be watchful about current account deficit and inflation."
Asked about the monetary policy and fiscal stance, he said the government was looking after them very carefully and as such it should not be a matter of any serious concern.
He said fiscal deficit at 4.2 per cent, despite last year's devastating earthquake, was not at all a serious issue for the country's economy.
"The important thing is that this fiscal deficit should be consistent with Fiscal Responsible Law at 2.5 per cent of the debt to GDP ratio," Mr Khan said.
He said 2006-07 was going to be the third consecutive good year like two previous years as far as macro economic fundamentals were concerned.
He was of the view that the government will achieve 7 per cent GDP growth in 2006-07 after 8.3 per cent growth rate achieved in 2004-05 and 6.6 per cent in 2005-06.
Mr. Khan did not believe that any future government will undo or slow down the reform process in Pakistan as it was meant to improve the overall economy.
Asked about the privatisation programme, the IMF director said, it was moving in the right direction aimed at improving efficiency of the business enterprises as well as ensuring more spending on social sectors.
"For us privatisation is proceeding well but we do not know how the issue of steel mills will eventually be resolved after the verdict by the Supreme Court," he added.
In reply to a question, he said he had read in the newspapers that Standard and Poors' was likely to downgrade Pakistan's positive out look.
"We would be happy to talk to the officials of the credit rating agency over the issue. But I do not see any particular reason as to why should they downgrade Pakistan's credit rating. Also, I do not know what is causing them to re-think about Pakistan's rating."
