ISLAMABAD: In its departing note, the International Monetary Fund (IMF) has asked Pakistan to carefully manage projects under the China-Pakistan Economic Corridor (CPEC) and continue with reform agenda to protect long term consumer interest and ensure greater economic consolidation.
Speaking to Islamabad-based journalists through video-link, IMF’s mission chief to Pakistan on completion of three-year $6.15 billion programme, Herald Finger also said Pakistan needed at least seven per cent economic growth rate annually to help absorb its two million job seekers.
He praised authorities for significantly reducing economic vulnerabilities, but added they needed a lot more to consolidate strengths by reducing public sector losses and increasing tax-to-GDP ratio to free up resources to finance priority development. He said the power sector used to add around Rs200bn a year to the public sector losses which had been reduced around Rs8bn in about two years through improved collection, reduced losses and better efficiency.
Responding to a question, Mr Finger said the recent awards to finance minister Ishaq Dar as ‘the best finance minister’ and governor central bank Ashraf Wathra as ‘governor of the year’ had nothing to do with the IMF.
“IMF is not involved” in these awards, said an aide to Mr Finger.
Mr Finger then explained that the organisation that gave award to the finance minister was “an independent publication” as well as the Euromony that gave another award to Mr Wathra.
He said he did not congratulate the finance minister over the award as the minister did not attend annual meetings of the IMF and the World Bank. Interestingly, the official statements had quoted the IMF and the World Bank publication to have given award to the finance minister followed by congratulations by the prime minister and provincial chief ministers and governors.
The IMF mission chief noted a series of ‘significant challenges’. The IMF said the exports were small in relation to GDP and have been declining, private investment (including foreign direct investment) is too low to support higher growth, public debt is still too high. It noted that fiscal revenue while having increased significantly, remained insufficient to support needed spending on public investment, health and education while international reserves, despite having tripled over the course of the programme, remained below comfortable levels.
Also, unemployment remained relatively high at 6pc (10.5pc among the youth and 9.5pc among women), the informal economy remained large while 30pc of the population lived below the poverty line, and income and gender inequality were significant. “Reinforcing macroeconomic resilience and a strong structural reform drive will be important to make further inroads in addressing these challenges”, the IMF stated in its report.
Mr Finger said Pakistan’s real effective exchange rate (REER) was 5-20pc higher according to IMF’s various analytical models that was “negatively affecting trade competitiveness”. He said further accumulation of foreign exchange reserves was needed to bolster external buffers, strengthen investor confidence and support private sector led growth.
Responding to a question, he said Pakistan’s debt had gradually increased that would gradually add to debt repayment but there was no immediate liquidity pressure. “Public debt has remained high and further fiscal consolidation is needed to ensure medium-term sustainability,” the IMF said, adding it increased by by about 2.5pc of GDP over the course of the IMF programme and remained high at about 65pc of GDP (430pc of revenue) as of end-June 2016, well above the emerging market average.
The IMF also said Pakistan’s tax-to-GDP ratio also remained below comparator emerging market countries, and advancing reforms of tax policy administration was needed to mobilise additional revenues to support fiscal consolidation and create fiscal space for growth-supporting priority spending. Furthermore, prudently managing current non-priority public expenditures would be important to support medium-term fiscal consolidation.
In its report, the IMF said the public sector accumulated losses from 1.7pc in 2012-13 to 2.3pc of GDP in 2015-16, but the pace of growth had slowed down. The IMF representative also called for rebalancing responsibilities and resources between the federal and provincial governments and greater focus on generating reasonable revenue from agriculture, real estate and services.
Talking about the CPEC, the IMF said if implemented properly the programme could go a long way in alleviating Pakistan’s long-standing supply side bottlenecks and lifting potential output, but over the long term it will need to be managed carefully in terms of outflows and consumer affordability.
As Chinese IPPs start their operations, profit repatriation by these companies would begin to rise in the subsequent years. “Repayment obligations to CPEC-related government borrowing, including amortization and interest payments, are expected to rise after fiscal year 2020-21 due to the concessional terms of most of these loans. Combined, these CPEC-related outflows could reach about 0.4pc of GDP per year over the longer run”.
The IMF said there was a need to ensure sound project evaluation and prioritisation mechanisms based on effective cost-benefit analysis and realistic forecasts of macroeconomic and financing conditions.
“The procurement process should be transparent and competitive, and there is a need to ensure transparency and accountability in project management and monitoring. Power purchase agreements with Chinese IPPs should be negotiated with terms that would adequately incentivise investment while ensuring that the cost of generated power remains favourable for the distribution system and consumers,” the IMF cautioned.
The fund said the country’s near-term macroeconomic performance would remain robust but poverty and unemployment would remain significant long term concerns. The IMF attributed this improvement to buoyant construction activity, strengthened private sector credit growth, and an investment upturn related CPEC.
Published in Dawn, October 14th, 2016