KARACHI, April 22: The IMF has urged Pakistan to “extricate” itself from “its still unsustainable debt” by continuing fiscal adjustments that will include tax measures to yield revenues worth about 0.5 per cent of the GDP on an annual basis.
Assuming a relatively low moratorium interest rates under bilateral agreements to be reached by September 1, 2002, the IMF appraisal mission, which concluded its visit on March 12, estimates that the ratio of the net present value( NPV) of foreign debts to exports will decline by about 30 per cent to 240 per cent. But, it is not enough to pull the country out of the debt trap.
By the end of the three-year PRGF arrangement, the NPV is projected to be at about 210 per cent of the exports. It will be still well above the 150 per cent threshold considered the benchmark for debt sustainability in case of heavily indebted poor countries (HIPCs).
Under the agreement with the Paris Club, Pakistan has committed to seeking comparable treatment from the public and private external bilateral creditors not participating in the agreement. The Chairman of the Paris Club has to be informed not later than September 1, 2002 on the progress made in negotiation with those creditors.
Out of a total of $13.5 billion debt owed to Paris Club creditors, the IMF report says agreement was reached in December 2001 for restructuring public sector pre-cut-off date debt in the amount of $12.5 billion.
To bring the debt to sustainable levels, IMF staff has advised Pakistan to increase revenue and rationalize expenditure.
The Memorandum of Economic and Fiscal Policies (MEFP) 2001-2004 lays down that the revenue would be underpinned by a package of tax measures worth about 0.5 per cent of the GDP on an annual basis, including increased taxation of oil products and elimination of various sales tax exemptions.
The visiting IMF mission had urged authorities last month to implement fully and on time the planned elimination of the most important sales tax exemptions and a large number of income tax exemptions in the next budget, apart from vigorously pursuing the CBR restructuring process. It also advised the government to strengthen tax refund system to “reduce room for discretion and fraud.”
And finally, IMF officials say, “savings should be achieved by reducing the many explicit or hidden subsidies and review the planned public expenditure to avoid spending on low priority projects. The IMF also says that weaknesses in the public enterprises represent risks for macro-economic management and a drag on growth.
Acknowledging that ambitious steps with the next budget are unlikely to be feasible due to ongoing regional tensions, the IMF wants that the rationalization of expenditure should include further cut in the share of defence spending in GDP.
The IMF review of the public finances states that due to likely higher defence expenditure on account of regional tensions, the projected fiscal deficit was raised from 5.3 per cent to 5.7 per cent. An additional defence spending of Rs15 billion is anticipated in the second half of current fiscal.
In their review of the first quarter of PRGF programme, the IMF officials were surprised that defence spending outlays were Rs8 billion lower than targeted. This was the result of savings due to appreciation of the rupee, lower prices of fuel and imports.