No change in fiscal deficit target: IMF

Published February 6, 2015
DUBAI: Finance Minister Ishaq Dar and IMF Mission Chief Jeffrey Franks addressing a joint press conference after their meeting here on Thursday.—INP
DUBAI: Finance Minister Ishaq Dar and IMF Mission Chief Jeffrey Franks addressing a joint press conference after their meeting here on Thursday.—INP

KARACHI: The IMF has not approved any relaxation in the fiscal deficit target, says Jeffrey Franks, outgoing mission chief for Pakistan, in an interview with Dawn. “The target remains at 4.9 per cent for this fiscal year.”

The government has been gearing up for a relaxation of this target, with Finance Minister Ishaq Dar arguing that the National Action Plan (NAP) and rehabilitation of IDPs are going to put a severe strain on the budget. In January he was quoted as saying the fiscal requirements under NAP and IDPs could be as high as Rs100 billion, which would make it necessary to revise the deficit target to 5.3pc.

Also read: IMF team gives go-ahead to sixth tranche of $550m

In remarks to the press just before joining the negotiations in Dubai, he reiterated that the fiscal deficit target as it stands will need to be revised upwards due to expenditures connected with implementation of the NAP.

“We have had discussions about the NAP,” says Franks, confirming that the matter of expenditure increases was indeed raised by the Pakistan delegation.

“We understand that there is a legitimate need for expenditure increases” due to the military operation and handling of the IDPs, “but there has been no final decision on change of fiscal deficit target. We will be discussing this further with the government in the coming weeks and months,” he says, declining to add further details on the nature and quantum of the expenditure increases being sought by the government. “These are ongoing discussions,” he says when asked for details.

The sixth review of Pakistan’s programme with the IMF has just concluded in Dubai. Disbursement of the funds will only come once the staff assessment has been approved by the board.

The government’s own press release following the talks makes no mention of any request for revision of the fiscal deficit target, saying only that it is “well underway to achieve the fiscal deficit target”, and adds that the government has “over-performed on the fiscal targets agreed with the IMF” for the first half of the fiscal year.

But Franks is a little more restrained in his assessment. “The deficit target for the month of December was met,” he says, “but the revenue target from the FBR was not”. He declined to provide figures. The government only contained the deficit through tight expenditure restraints, he adds.

According to programme documents, the target for net tax revenues collected by the FBR was Rs1,195bn for the period ending in December, after the overall target was revised downward by Rs54bn during the last round of negotiations with the IMF. In public comments quoted in the press, the finance minister has said Rs1,162bn was collected in this period.

Franks acknowledges the challenges facing the government, saying “the oil price declines are making it difficult for the FBR to meet its targets”.

“We have discussed a number of steps the authorities can take to boost revenues, some of them already a part of the programme, but some new ones too.”

He emphasised recoveries in the power sector and said the decline in oil prices provided an opportunity to close the gap between the cost of electricity, and the cost billed to the consumer. Closing this gap is important to contain the circular debt and to ensure that “taxpayers are not called upon to bail out the energy sector” periodically.

Declining oil prices have strained the government’s revenues since a large share of these are collected from taxing oil. But the declines have also brought some relief for the external sector, and “created room for the government to restructure the way it approaches tariffs”.

“If we lower the consumer price by less than the reductions in the cost of production, then the gap will decline or even reverse.”

The government’s press release makes no mention of the circular debt, any new revenue measures being contemplated, or any discussions on legislation to enhance State Bank autonomy, create a legal framework for deposit insurance or privatisation.

“There hasn’t been a lot of movement on legislation for State Bank autonomy,” says Franks, hinting at reluctance on the government’s part to advance this reform. “We had some discussions on what the government could and would do in this area.”

The Fund’s press release paints a positive picture overall, saying the current account deficit is expected to narrow to 1.2pc of GDP, real GDP growth is expected at 4.3pc, and continuing strengthening of the foreign exchange reserves that reached $10.5bn by end December, 2014.

All performance criteria during the review period were met, he points out, saying “there has certainly been an improvement in performance since the last review”.

The next tranche, or $518m, will be the seventh released as part of the $6.6bn Extended Fund Facility that was approved on Sept 4, 2013.

Published in Dawn, February 6th, 2015

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