They want Pakistan to default like Lanka: Dar

ISLAMABAD: Finance Minister Ishaq Dar made it clear on Thursday that “Pakistan is a sovereign country and cannot accept everything the IMF [International Monetary Fund] demands”.

He was responding to the IMF objection to the tax exemptions given in the recently unveiled budget while addressing the Senate Standing Committee on Finance and Revenue. He said that as a sovereign country, Islamabad should have the right to give some tax concessions. “The IMF wants us not to give tax concessions in any sector,” he added.

About the widespread rumours of default, the finance minister claimed that geopolitics was aimed at forcing Pakistan to default. “Foreign hostile elements want Pakistan to turn into another Sri Lanka and then the IMF will negotiate with Islamabad,” Dar alleged. However, he made it clear Pakistan would not become another Sri Lanka at all. He said the Chinese understand that “politics is being played with Pakistan”, so they rolled over deposits and re-financed the commercial loans. Earlier, they were also hesitant on moving ahead.

“IMF or no IMF, there are difficulties but we will manage,” he claimed. The IMF, he said, was delaying the revival of the programme and wasting time. “There are no valid reasons for delaying the 9th Review of the IMF, and the Fund staff approach is non-professional,” he said and added that he had categorically refused to share the budgetary details with the IMF without completion of the pending 9th Review. However, when the prime minister instructed him after a telephonic conversation with the IMF MD, then he had to share the budgetary framework.

Dar said there were three pending issues with the IMF, including market-based exchange rate, budgetary framework and external financing gap. He said there were three rates on exchange rates, including interbank rates, open market and Hawala or grey market rates. There was a demand to match the exchange rate with the grey market or Hawala/hundi rate prevalent in neighbouring country, which used to secure billions of dollars during the Trump administration. But after the withdrawal of the US, their dollar requirement heavily relied upon smuggling of hard green currency from Pakistan.

The minister admitted that Pakistan was facing a dollar liquidity crunch in the wake of dried inflows and increased foreign debt repayments, but reminded in the same breath that Pakistan possessed the biggest gas pipeline worth $50 billion and mineral resources of Reko-Diq with the value of trillions of dollars.

He said that first the IMF delayed sending its review mission for three months, as the review had become due in the first week of November 2022, but they dispatched their review mission to Pakistan on January 31, which negotiated till February 9, 2023.

The IMF did not issue the press release on February 9, 2023, on the conclusion of talks and instead released the press release after the departure of their plane at 4am on February 10, 2023.

It was a difficult decision for him to share the press release without making any changes but he took the decision to avoid delays in issuing statements when the country was in the grip of uncertainties. However, he had done a presser on February 10, 2023 in the morning and disclosed all the conditions of the IMF programme.

Slamming the amendments made to the State Bank of Pakistan Act during the previous government’s tenure, the finance minister said those amendments led to the creation of a state within a state. “The amendments made to the State Bank Act are unsustainable,” he added. The finance minister said the changes were made to the SBP’s governing laws, but they were not complete yet.

On the external financing gap, he said the IMF worked out Current Account Deficit (CAD) at $7 billion, so the external financing gap stood at $6 billion. However, the figures have now come out as the CAD stood at $3.3 billion and it is estimated that it will come down to $4 billion by the end of June 2023. This external financing gap should have been reduced to $3 billion accordingly, the minister added.

Pakistan, he said, managed external financing guarantees of $4 billion, including $2 billion from Saudi Arabia, $1 billion from the UAE, $450 million from the World Bank under the RISE-II programme, $250 million from AIIB, and $350 million in cash amount from Geneva pledges. He said that the government had paid off $5.5 billion to commercial banks and without signing staff level agreement, the banks were sitting on the fence and unwilling to refinance their loans.

The minister said that IMF MD made a statement publicly that Pakistan would not default. He said the foreign exchange reserves depleted by $6.4 billion in one quarter and there was no option but to impose import restrictions to avoid default. He said the first priority was paying external debt obligations, but again reminded that the public external debt went up from $70 billion to $100 billion.

The external debt and liabilities had gone up to $130 billion. He asked why financial discipline was not placed in the last four years of rule and the country’s external front vulnerabilities increased manifolds.

Dar said that the government had to manage the LCs in order to avoid depletion of foreign exchange reserves and commented that there would be some good news coming on June 30, 2023, though he did not provide its details.

The finance minister assured the senators that the government knew how much tax it needs to collect and from where the revenue could be generated. He added that was the reason the government increased the tax target from Rs7.2 trillion to Rs9.2 trillion in the upcoming budget. “This target is apart from tax exemption. No budget is coming from tax-exempt sectors. We will take the IMF into confidence on this,” he said while urging that Pakistan should be allowed to decide on the matter.

The finance minister also added that the government in the new budget is focusing on four drivers for economic growth. He also spoke about the package given to the IT sector, explaining that the government could not “ban” concessions to the youth in the IT sector while following the IMF’s demands. “We want to give employment opportunities to the youth through the IT sector,” the federal minister said. He added that the government has set a target of achieving $15 billion in IT exports in the next five years. “IT exports were $2.5 billion this year, which is very less. We want to take IT exports to $4.5 billion in the coming year,” he added.

On Pakistan’s external payments, he assured, once again, that the country would not default or defer any foreign payment. “Pakistan does not need to go to Paris Club to reschedule loans. We will manage external payments of Pakistan,” Dar said.

Meanwhile, the FBR high-ups briefed the IMF on the proposed tax amnesty scheme and informed the Fund that the government provided tax relief of Rs23 billion in the budget. The IMF objected to increased tax exemptions/incentives given in the budget to different sectors. It also raised questions about increased expenditure costs of Rs2.3 trillion instead of achieving a gradual reduction.

The FBR high-ups told the IMF that a major chunk of increased tax expenditures cost escalated due to keeping the GST rate at zero on POL products. Under the existing IMF programme, the FBR undertook Corporate Income Tax reforms, then GST reforms and finally Personal Income Tax reforms and there was nothing on the menu for abolishing more tax exemptions. However, the IMF was not satisfied with this argument and was of the view that when there was a bar that no additional amnesty could be announced, then there was no justification to bring $100,000 remittances from abroad without asking questions.