A six-member IMF review mission, which concluded its about two-weeks long talks with officials, is believed to have told the authorities that subsidies contribute to increasing vulnerabilities of the economy and the government should review the issue.
However, the mission had no objection to providing subsidies on diesel and kerosene oil as these concerned the common man. The fund officials were of the view that there was not much “fiscal space available” for offering other subsidies.
Ever since Pakistan has opted out of IMF programme after the expiry of $1.5 billion Poverty Growth Reduction Facility (PRGF), Fund officials are not in a position to impose any conditionalities. The mission is believed to have said that now, Pakistan needed to observe financial discipline on its own. It called for pursing prudent fiscal practices.
The second issue over which the mission expressed its reservations was the inflation rate of 7.6 per cent at the end June 2006. The IMF felt that 6.5 per cent inflation target set for the current financial year was an “ambitious one”. It should be met by “further tightening monetary policy stance” by the central bank.
The Fund officials noted that inflation has picked up during the last few months and needed to be brought down for which the State Bank should adopt a two-prong strategy aimed at reducing external imbalance by discouraging imports and credit growth for the private as well as for the government sector.
“We were told by the IMF that the central bank must maintain its tight monetary stance, failing which, inflation would not come down nor would imports reduce and eventually both these issues will become considerable threat to the economy”, a source said. He conceded that IMF’s advice was timely to contain inflationary pressures.
The third issue discussed extensively was how to increase local and foreign investment. Although the mission appreciated the 20 per cent increase in the private investment over last year, it said that it needed to be increased but without offering, ‘fresh fiscal and non- fiscal incentives”.
The key issue, IMF, believes, is macro economic stability and confidence in the economy. Acknowledging that the cost of doing business in Pakistan was still very high, the Fund proposed removing bottlenecks, especially cumbersome government procedures and rationalising tariffs including that on electricity and gas.
The mission was of the view that Pakistan should improve its old and fragile infrastructure which causes problems in attracting investment.
The government side informed the mission that Pakistan was seeking substantial development loans from the World Bank and the Asian Development Bank (ADB) to improve its infrastructure. And as a first step, the ADB has agreed to offer $150-200 million soft loan for Karachi city.
The fourth point, on which the mission stressed, was the need for spending more on education. It called for increasing the current 2.5 per cent GDP spending to four per cent on education if not 10 per cent. Indeed, Pakistan needs to invest more on its human capital.
The fifth issue that consumed a lot of time during discussions was that of reducing poverty and creating more jobs opportunities.
“The IMF expressed its satisfaction over reduction in poverty during the last few years but it does not consider it enough and wants a further cut in the menace of poverty”, an official admitted.
The IMF noted that there was not an ideal distribution of wealth between the rich and the poor in Pakistan and that maximum number of people should benefit from the country’s improved GDP growth rate.
In addition to that, the mission insisted on the government undertaking what it termed, “the very difficult” second generation reforms” in order to address governance and transparency related issues.
It also sought measures to protect property rights and to create investment friendly environment in the country.
The first generation reforms, which included tax and trade reforms, were easy but the second generation reforms were tough and will have to be undertaken very carefully. Pakistan will have to undertake institutional, especially civil and judicial reforms.
According to the IMF, one of the most important challenges, facing the government was to achieve a long-term seven per cent plus growth rate to alleviate poverty and to create new employment opportunities.
Pakistan’s current account deficit at $5.5 billion, IMF believed, was likely to be $6-7 billion during this financial year. But it did not see any problem over the issue, the deficit would be financed by the ongoing privatisation programme, increased foreign direct investment (FDI) and the foreign borrowings. “This current account deficit seems to be the same which was seen last year and the government is in a position to finance it”, a source said.
He said, the current account deficit should not pose any major risk to the government. “But The IMF’s policy advice to the government is to be watchful about current account deficit and inflation.
Fiscal deficit at 4.2 per cent despite last year’s devastating earthquake was not considered a serious issue for the economy.
The important thing for the IMF is that this fiscal deficit should be consistent with Fiscal Responsibility Law.
The year 2006-07, according to IMF, was going to be a good year like two previous years as far as macro economic fundamentals were concerned. The government will achieve a seven per cent GDP growth in 2006-07 after a 8.3 per cent growth rate was achieved in 2004-05 and 6.6 per cent in 2005-06. This year agriculture growth also looked better.
About the privatisation programme, the IMF maintained, it was moving in the right direction aimed at improving efficiency of the business enterprises.
According to a press statement issued by the IMF local office, Pakistan should lower its external current account deficit and enhance public savings with a view to ensure fiscal consolidation and to create the right environment for local and foreign investment.
The mission noted that fiscal policy had an important role to play in bringing down the external current account deficit and addressing the external vulnerabilities. “It thus recommended a path for further fiscal consolidation through higher public savings”.
“Continuation of macro-economic stability, market reforms, the privatisation programme, trade liberalization, and improvement in the physical and human infrastructure will provide the right environment for encouraging investment and increasing productivity,” said the IMf press release/.
In the mission’s assessment, the prospects for sustained high economic growth in 2006-07 and over the medium-term remain excellent, with evidence of a strong pick-up in domestic and foreign direct investment, as Pakistan is increasingly being viewed as a promising destination for investment.
The mission also noted that larger inflows on the financing side of the balance of payments, including foreign direct investment, had ensured a full financing of the current account deficit in 2005-06, and added to international reserves.
The prospects for a similar outcome in 2006-07 and beyond looked good, provided a continuation of the recent deceleration in the brisk pace of imports growth, and strong export performance.