“The Privatisation of the Pakistan International Airlines (PIA) will be carried out by December 2015 and of Pakistan Steel Mills (PSM) by March 2016,” as par the programme Pakistan has submitted to the International Monetary Fund (IMF).
The IMF’s Mission Chief, Herald Finger, said earlier yesterday that having no sufficient proof of figure fudging, Pakistan’s budget deficit figure was slightly revised upward from 5.3% to 5.4% of the GDP for end June 2015 while Islamabad needed to improve its data quality.
He said that the Fund did not force Islamabad to go for launching the $500 Eurobond at higher rates as it was not part of the IMF’s conditions.
“We don’t have sufficient evidence of any wrongdoing of figure fudging by Pakistan but there is room for an improvement. The IMF will provide technical assistance to Pakistan to improve its data quality,” Finger told reporters through an audio conference from the Fund’s headquarters in Washington DC on Tuesday evening.
When asked about the criticism by economists and certain reports that the IMF has probed budget deficit figures, the IMF chief said that the budget deficit figure was revised upward by 0.1 percent of the GDP but it did not alter the trust of the Fund.
There are different ways to calculate the budget deficit as many assessed it though the financing side, he said, while others analyse above the line method meaning by difference between revenues and expenditures, which is more reliable.
In Pakistan, he said the losses of Public Sector Enterprises (PSEs) are not made part of the budget deficit as the circular debt which stands at two percent of the GDP at the moment did not reflect in the budget deficit. Thirdly, the receipts of the State Bank of Pakistan are not part of the general government. All the privatisation transactions of banks in the past were treated in the same manner, he said.
To another question about discrepancy in statistics to the tune of Rs187 billion in the last budget deficit, he said that historically such discrepancy was even bigger than the last one.
According to the IMF’s review report released on Tuesday, Islamabad agreed for new structural benchmarks under the $6.64 billion bailout package including preparing and submitting to the National Assembly the draft legislation against “benami” transactions by end-January 2016 in order to improve tax compliance and enforcement.
“Pakistan also agreed to enforce performance through setting quarterly loss-reduction, collection, and recovery targets consistent with our arrears reduction plan for each Disco till October 15, 2015 for tackling losses, raise payment compliance, and improve energy efficiency and service delivery in the energy sector,” he said.
Islamabad also accepts to complete the bidding process for shares of Fesco by end-June 2016 to privatise electricity distribution companies in line with arrears reduction plan, and structural policies financial sector time frame.
The IMF staff, in its appraisal review report on Pakistan’s state of economy, stated that economic activity was improving and vulnerabilities were gradually receding.
The real GDP growth is expected to increase to around 4.5 percent this fiscal year 2015-16. Headline inflation is below two percent, and a prudent monetary policy stance should help ensure that inflation expectations remain well-anchored.
Despite some slippages in meeting the programme targets, the authorities have made significant progress in addressing fiscal imbalances and building international reserve buffers which, supported by tailwinds from lower oil prices, now exceed three months of imports.
Social protection through the BISP has further expanded, and untargeted electricity subsidies have been reduced. Further progress will be needed to achieve a sustainable economic transformation. Economic growth remains below the 5-7 percent range that will be needed to absorb new entrants into the labour market and achieve improvements in living standards for wide segments of society.
Public debt remains high, the tax-to-GDP ratio — despite recent progress — is still among the lowest in the world, private investment is still well below desired outcomes, and exports have declined from an already low base. Power outages and the business climate continue to restrain competitiveness and growth. In addition, the appreciation of the real effective exchange rate has been eroding competitiveness, leaving the external balance vulnerable. Strong reform implementation will be needed to reinforce the recent gains in economic stabilization and sustainably raise growth. The authorities should be prepared to take measures as necessary to keep the fiscal programme on track. While the shortfall in end-fiscal year performance has delayed the authorities’ adjustment efforts, their continued commitment to the FY2015/16 fiscal targets is welcome.
To this end, it will be important to strengthen the tax revenue mobilisation, contain current expenditures as needed, and strengthen the coordination mechanism with the provinces. In the event that projections at the time of the ninth review show a fiscal gap, planned tax base broadening measures should be pulled forward and implemented promptly.
More generally, a concerted effort is needed to raise the revenue ratio. The authorities’ actions to significantly restrict the legal authority for granting administrative tax exemptions are highly welcomed. It will be important to continue and deepen efforts in revenue administration reforms to improve compliance and enforcement in order to broaden the tax net rather than increasing the tax burden on the existing narrow tax base. Advancing the agenda on better governance and reducing the likelihood of corruption in tax administration are also crucial to attain these objectives. Enhancing fiscal policy frameworks will help fiscal consolidation efforts. Strengthening the FRDL will provide room for counter-cyclical fiscal policy and anchor debt sustainability. Improving transparency, management of fiscal risks associated with off-budget operations, and debt management will help strengthen resilience. Going forward, devolution of revenue and expenditure responsibilities should be better balanced between the federal government and provinces. Moreover, efforts should continue to increase social protection through the BISP.
Efforts must continue to build reserves and strengthen SBP’s independence. Continued and ambitious accumulation of international reserves in the context of the fallen oil bill remains strongly desirable: international financial markets have been volatile, the balance of payments position remains vulnerable, and reserves are still significantly below adequacy norms. The implementation of the new interest rate corridor is a major step to improve the operation of the monetary policy framework. The amendments to the SBP Act, once enacted, will be important to strengthen the autonomy of the SBP. Looking ahead, further progress will be needed to address remaining recommendations of the 2013 Safeguards Assessment report by June 2016. Progress with bank capitalisation is welcome, as are plans for continued reforms to strengthen financial stability. Having brought all banks into compliance with capital adequacy standards, the continuation of efforts to bring a number of small banks into compliance with statutory requirements is a priority. The authorities’ actions to improve foreclosure and corporate restructuring legislation should help address nonperforming loans in the banking system. Efforts should continue to move forward with the Deposit Protection Fund, Futures Trading Bill, and Securities Act, which will constitute significant improvements toward strengthening financial stability. To bolster the effectiveness of the AML/CFT framework and mitigate risks, including the proceeds of corruption and tax crimes and the financing of terrorism, the authorities remain committed to enacting the draft amendments to the AML Act, despite recent delays. Similarly, ongoing efforts to strengthen the CFT framework should continue, including implementation of relevant UNSCRs.
Power sector reforms should be swiftly implemented. Securing reliable and continuous supply of electricity, improving the system’s efficiency, and moving the sector to cost recovery will be critical for growth and continued fiscal consolidation. In this context, the authorities’ resolve to step up efforts in the implementation of the power sector arrears reduction plan is welcomed. Swift implementation will unlock existing idle generation capacity and reduce the potential drain from such arrears on public resources. Ongoing legal challenges to electricity surcharges pose potential risks to the budget and efforts to fix the power sector.
The authorities’ contingency plans, including their commitment to raise tariffs as needed in case of a negative outcome to legal challenges to surcharges, are welcome as they mitigate these risks.
“Significant further progress is within reach if momentum with structural reforms continues. Following delays in the planned privatization of public sector enterprises, follow-through on revised privatisation plans, and commitment to restructure key loss-making enterprises will be essential. Continued efforts to reform the gas sector are welcome, with emphasis on price rationalisation and improvements in domestic production. Business climate reforms are advancing, and future efforts should focus on legislative and administrative changes that expedite business climate improvements,” the staff report concluded.
