ISLAMABAD / WASHINGTON: Amid rising circular debt and revenue shortfall, the government plans to introduce additional tax measures of around Rs40 billion in a couple of weeks to meet the fiscal deficit limit and carry on with the IMF programme.
This was stated by International Monetary Fund’s mission chief to Pakistan Harald Finger at a news briefing on Friday. He was assisted by Daniela Gressani, the IMF deputy director for the Middle East and Central Asia and resident representative to Pakistan Tokhir Mirzoev.
The IMF mission also had a rare session with the Senate Standing Committee on Finance and Revenue against the backdrop of the panel’s resistance to let tax-related cases covered by the anti-money laundering / counter terror financing laws.
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Mr Finger said Pakistan faced Rs40bn revenue shortfall in the first quarter. “We worked out with authorities the strategy to meet fiscal deficit target and the government will take measures of that amount to bridge the gap.”
Responding to questions, he said the government had to finalise the measures in a few weeks. He agreed with a questioner that these additional measures had now become “prior action” before going into the next quarterly review.
He said the question of an increase in power tariff was not discussed but confirmed that the circular debt had gone up to Rs661bn, including payable stocks of Rs326bn and Rs335bn parked consistently with the power holding company.
The IMF had previously put the debt at about Rs615bn, including payable stocks at Rs280bn.
The mission chief, however, said the authorities had met the quarterly target on power sector’s recoveries.
Responding to a question on Pakistan’s exchange rate, Mr Finger said that based on the IMF model Pakistan’s real exchange rate was overvalued to the extent of 5 to 20 per cent depending on different scenarios.
He said some recent gains in large-scale manufacturing, pick-up in construction activities, decline in international oil prices, the China-Pakistan Economic Corridor and better foreign remittances were signs of improved economic activity but generally the investment climate had a long way to go as private sector credit had not gained momentum.
He did not agree with a perception that the government had built foreign exchange reserves through foreign borrowings and said lower oil prices had provided a cushion to the authorities to build reserves through market operations.
He, however, agreed that sustainability of the reserves had some structural challenges because of exports and global conditions.
IMF resident representative Mr Mirzoev said the fund’s global methodology recognised the government’s expenditures and revenue numbers in the fiscal deficit and the circular debt amount could not be considered a part of deficit unless they actually get transferred to the budget.
Asked if IMF loans could lead to Pakistan’s external vulnerabilities and compromise on its nuclear assets, Mr Finger said there was absolutely no link between Pakistan’s nuclear programme and IMF programme. In fact, he added, the IMF loans were resulting in reduced debt-to-GDP ratio and increasing foreign exchange reserves that would enable the country to absorb shocks and reduce its vulnerabilities.
A statement issued by the IMF headquarters in Washington said that Pakistan’s real GDP would grow by about 4.5 percent in fiscal year 2015-16.
“Economic activity continues to improve while challenges remain.”
But the IMF warned that the slowdown in private credit growth and weakness in exports and imports were “weighing on growth prospects.”
It noted that Pakistan’s gross international reserves reached $15.2bn by end-September 2015, up from $13.5bn at end-June 2015 and covering close to four months of prospective imports. The IMF said the country had also met the end-September 2015 quantitative performance criteria on the State of Bank’s net international reserves, government borrowing from the SBP, and foreign currency swap / forward position.
However, the performance criteria on net domestic assets and the fiscal deficit were missed, as was the indicative target on tax revenue.
The IMF urged Pakistani authorities to complete their reform agenda because it was critical for it to achieve its broader economic objectives, and continued effort will be important in the period ahead.
It also urged them to promote gender equality, and further expand coverage under the Benazir Income Support Programme to protect the most vulnerable.
Published in Dawn, November 7th, 2015