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August 5, 2016

Pakistan bids adieu to IMF

Top Story

August 5, 2016

ISLAMABAD: Pakistan on Thursday said goodbye to the IMF as both sides concluded the twelfth review successfully under the $6.4 billion Extended Fund Facility (EFF).

However, Islamabad would have to continue the reforms path after end of the Fund sponsored programme for raising revenues and overcoming cash bleeding public sector enterprises (PSEs).

“Yes, Pakistan has said goodbye to the IMF. The Fund’s management takes some weeks for preparation of its report and then the IMF Board is expected to grant approval of the last tranche of $102 million by end September 2016,” Federal Minister for Finance Ishaq Dar told The News from Dubai on telephone after concluding the review talks with the IMF on Thursday afternoon.

The IMF’s mission chief, Herald Finger, said that to consolidate and reinforce the gains achieved in the last three years by Pakistan, the economic reform agenda needs to continue after the programme ends.

“In this context, it will be important to further strengthen public finances and external buffers, broaden the tax net, improve public financial management, strengthen the monetary policy framework, address losses in PSEs, complete the energy sector reforms, and accelerate competitiveness-enhancing improvements of the business climate, including the trade regime,” he said and added that the continued progress with these reforms would be critical to reinforce the authorities’ achievements under this IMF-supported programme.

According to a statement issued by the Finance Ministry here that after completing the 12th review with the IMF mission led by Harald Finger, Ishaq Dar stated that Pakistan and the IMF successfully completed negotiations on the twelfth and final Review under the three-year EFF programme for an amount of $6.4 billion.

The successful completion of the last review is indicative of the government’s strong commitment to implement difficult structural reforms in the areas of taxation, energy, monetary/financial sectors and public sector enterprises.

Pakistan, the minister said, met the end-June 2016 Quantitative Performance Criteria on Net International Reserves, Foreign currency swap/forward position, and government borrowing from SBP by significant margins. The targets on Net Domestic Assets and budget deficit were missed marginally. The indicative target for end-June, 2016 on targeted cash transfers through the BISP and on power sector arrears were met. The FBR not only achieved its annual target of Rs.3104 billion but exceeded it. This indeed is a remarkable achievement as no downward revision was made in the FBR revenue targets and the originally fixed target was achieved and exceeded, which is an unprecedented accomplishment and speaks of the success of the economic policies being followed by the present government.

The performance of FBR becomes even more creditable when viewed in the context of the shortfall of Rs40 billion recorded in the first quarter. In the subsequent quarters, the indicative targets were met wiping out the deficit of the first quarter. Against an end-year target of Rs3,104 billion, the FBR collected Rs3,115 billion, according to provisional figures, which shows a growth in excess of 20 percent, over Rs2,589 billion collected in FY2015. In the process, the figure of FBR’s tax-to-GDP ratio registered a substantial increase of one percent.

“We achieved real GDP growth rate of 4.71 percent in FY 2016, which is the highest in the last eight  years. Since FY 2014, we have maintained GDP growth rate of above 4 percent. For the next fiscal year, GDP growth is targeted at 5.7 percent which will gradually rise to 7 percent in FY 2017.

“A welcome development is the increase in fixed investment. Electricity and gas supplies continued to improve since the start of the current fiscal year. The CPEC will also play a significant role in further boosting economic activities,” he added.

The external sector is stable on the back of continued flows from IFIs, low oil prices, rising remittances albeit at a slower pace, which helped narrow down the current account deficit and maintained stability in foreign exchange market. The foreign exchange reserves increased to $23 billion as of 22nd July 2016 of which SBP reserves stood at $18.037 billion and that of scheduled banks at $4.960 billion. The net International Reserves of the SBP have increased from a low of negative $2.5 billion at the start of the programme to positive $7.5 billion by end-June 2016.Despite the fact that the government is reducing its fiscal deficit, allocation for Public Sector Development Programme (PSDP) has more than doubled and social safety net expenditures have increased by over 300 percent through the four budgets of the current government.

“The ratio of FBR’s tax to GDP has improved significantly over the last three years, from 8.45 percent in FY 2013 to 10.5 percent in FY 2016, which is beyond the projected increase of 10.2 percent for the period.

We continue to diversify financing from both domestic and external sources, lengthen the maturity profile of domestic debt and improve the balance between domestic and external debt. To achieve these objectives, we are working to further strengthen the Debt Policy Coordination Office (DPCO). We have appointed the Risk Management staff; and the Medium Term Debt Management Strategy (MTDS) has already been published. Rate setting between retail and wholesale markets have also been synchronised.”

The Energy sector reforms are on priority agenda of the government and are regularly monitored by the prime minister through the Cabinet Committee on Energy.

According to the statement issued by the IMF on Thursday, an IMF staff mission, led by Harald Finger, visited Dubai from July 26 – August 4, 2016 to conduct discussions on the twelfth and final review of Pakistan’s economic programme supported by a three-year IMF EFF arrangement.

The staff team met with Finance Minister Ishaq Dar, State Bank of Pakistan (SBP) Governor Ashraf Wathra and other senior officials.At the conclusion of the mission, Harald Finger stated that after productive discussions, the mission and the Pakistani authorities have reached staff-level agreement on the completion of the twelfth and final review under the EFF arrangement.

The agreement is subject to approval by the IMF Management and the Executive Board. Upon completion of this review, SDR 73 million (about US$102 million) will be made available to Pakistan.

“Growth is expected to reach 5 percent in FY 2016/17, supported by buoyant construction activity, strengthened private sector credit growth, and an investment upturn related to the China Pakistan Economic Corridor (CPEC). Nevertheless, a challenging global environment and declining exports are weighing on growth prospects. Average inflation is expected at around 5.2 percent in FY 2016/17, remaining well-anchored by continued prudent monetary policy. Gross international reserves reached US$18.1 billion at end-June 2016, covering over four months of prospective imports.

“Programme performance in the fourth quarter of FY2015/16 has been solid. Most end-June 2016 quantitative performance criteria (PCs) were met, although the ceilings on the budget deficit and net domestic assets (NDA) of the State Bank of Pakistan (SBP) were exceeded by small margins. We welcome the authorities’ commitment to take remedial actions in these areas. All indicative targets and structural benchmarks (SB) were met, except for the delayed notification of multi-year tariffs for three power distribution companies.

“In the course of the IMF-supported programme, Harald Finger said that Pakistan’s economy made significant progress toward strengthening macroeconomic and financial stability and resilience, and laying foundations for higher, more sustainable, and inclusive growth. Growth gradually accelerated, international reserve buffers have been rebuilt, and the budget deficit narrowed significantly, helped by sizeable growth in tax revenue collection. Inflation declined, helped by lower oil prices and improved monetary and fiscal policies. Regulatory reforms and improved energy sector performance have slowed the accumulation of arrears and begun to reduce outages. Coverage under the Benazir Income Support Programme (BISP) has expanded, and stipends increased by over 60 percent. Regulations to fight money-laundering and financing of terrorism have been strengthened. Despite some delays, the authorities continue to advance in their work toward restructuring and divesting ailing public sector enterprises (PSEs)

“The Mission thanks the authorities and technical staff for the constructive dialogue over the past three years. The IMF reaffirms its ongoing support for Pakistan, including through continued policy dialogue and technical assistance,” the IMF statement concluded.

Dr Ashfaque H Khan, renowned economist, said that the government would not take more money after completing the existing EFF programme but the Fund would continue monitoring of the country’s economy under post programme monitoring (PPM) on quarterly basis. The government, he said, intends to use it as slogan for political purposes as the reserves were built up through borrowed money but the country will have to go back to the IMF after medium term.