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Talks with IMF in critical phase

July 01, 2013

WITH the approval of the federal budget by the National Assembly, and the partial tackling of the chronic circular debt through an injection of Rs326 billion, the government’s focus has now turned to hammering out issues with the International Monetary Fund for possible balance of payments support.

The dialogue with the visiting IMF mission, led by Jaffrey Franks, over meeting major economic targets, was initiated on June 19. However, the new programme may not turn out to be as hunky-dory as the government expected after its proposal to scale down the fiscal deficit by 2.5 per cent of GDP to 6.3 per cent next year.

Unconvinced by the fiscal and economic projections and the expected outcomes, the IMF mission wants a reduction in development spending (which was increased 50 per cent under the PML-N’s first federal budget) and more taxes to limit the fiscal deficit.

Finance Minister Ishaq Dar, responding to opposition parliamentarians in the National Assembly, confirmed tough talks with the IMF and its demand for more taxes. However, he tried to cool down tempers by saying that no more taxes would be imposed on IMF pressure.

“Programme or no programme, we shall not impose further taxes. We have rejected the IMF’s proposal for imposition of more taxes,” he said, and went on to confirm that if the lender of last resort did not accept the PML-N’s economic roadmap, a contingency plan-B was ready to shore up foreign exchange reserves and improve revenue collection by reducing tax theft and widening the tax base.

However, Dar conceded in the same breath that the government’s ambitious tax collection target was a tall order. Quarterly adjustments in energy prices are another difficult IMF demand, which Mr Dar refrained from talking about in public.

The track record of the Federal Board of Revenue in raising tax revenue through administrative measures over the past few years has never been impressive. In fact, its dismal performance is demonstrated by an enormous shortfall of over Rs300 billion in its own revenue target for 2012-13.

The IMF mission has raised question marks on the government’s tax collection target, as well as a loose monetary policy, projections for foreign inflows, and the proposed measures to achieve macroeconomic targets in the medium-term.

The policy rate cut announced by the central bank last week had also not gone well with the visiting IMF mission. It desired the tightening of monetary policy to control the fiscal deficit, inflation and exchange rate stability.

This is contrary to the official view of providing policy support to the private sector to ensure economic growth — now at the lowest ebb — and to control the country’s growing debt levels.

The IMF mission also differed with the government’s projection to collect Rs2,007 billion in tax revenue in 2012-13. According to the Fund’s baseline assessment, the current year’s tax collection could touch Rs1,980 billion at best. With this base, the IMF did not see the FBR’s ability to achieve next year’s tax target of Rs2,475 billion, which includes an estimated over Rs200 billion in additional taxes.

Unlike the government’s estimate of increasing the tax-to-GDP ratio to over 10.1 per cent of GDP next year from the current 8.2 per cent, the IMF believed that the tax measures could help it achieve a ratio of no more than nine per cent.

Over the next couple of days (until July 3), the two sides will be in a wrapping-up phase, with more clarity to emerge if the new IMF programme is forthcoming, and if so, at what conditions. If not, the government’s plan-B will be put into motion.

But lenders having an insight in international financial affairs believe the talk of an alternative financing plan may be a good idea for bargaining purposes, but without an IMF programme, even the plan-B will be difficult to implement.

In their view, even friends like Japan, China and the Arabs want an umbrella programme of the IMF, to benefit from its professional assessment and monitoring on a regular basis. Capital market investors and credit rating agencies become more comfortable under an IMF programme, and more so for a country plagued by militancy and political and economic uncertainties.

Under its plan-B, the government plans to take a series of steps, including aggressively pursuing reconciliation and early disbursement of all outstanding Coalition Support Fund amounts from the US, and launching a campaign in major financial capitals to market Pakistan’s international bonds.

This will be dovetailed with attempts to muster financial support from friendly countries for investment and economic assistance, including oil supplies on deferred payments, cash deposits and participation in privatisation of state-owned entities.

Immediate actions will also be taken to recover PTCL’s sale proceeds from UAE’s Etisalat, and the auction of 3rd generation telecom licenses, to beef up foreign reserves to meet international obligations of around $6 billion (with almost half of it to the IMF) during the next fiscal year, with first major payments coming due in October-November this year.

So the situation has to be cleared now, without any delay. A successful conclusion of talks with the IMF this week will enable the Fund staff to submit its report and recommendation for a new programme to its executive board soon after its return, so that the first disbursement starts flowing by the end of September 2013.

Pakistan’s quota with the IMF currently stands at about 1.1 billion special drawing rights (SDRs), and since it will be availing 300 per cent of its quota, the total size of the programme works out at 3.5 billion SDRs or $5.25 billion (1SDR= $1.5). In net present value terms, the Extended Fund Facility (EFF) becomes comparatively cheaper, given its longer repayment schedule. It involves an effective interest rate of about nine per cent, with repayment in 10 years.

Since the World Bank and the Asian Development Bank are also part of the discussions, a green signal from the IMF could also lead to resumption of loans from these two multilateral agencies, particularly for the power sector.

The EFF is provided to a nation facing serious medium-term balance of payment problems, including those limiting private capital options because of structural weaknesses that require a longer time for implementing medium-term structural reforms. The Facility is considered helpful for an economy facing low growth and an inherently weak balance of payments position.