Dollar to free float, dearness to climb

ISLAMABAD: The International Monetary Fund (IMF) says the economic reforms programme envisages a flexible market-determined exchange rate, energy sector reforms to eliminate quasi-fiscal losses and encourage investment, including by depoliticising gas and power tariff setting over the programme period.

The IMF in its detailed announcement stated that Pakistani authorities’ economic reforms programme aims to put the country’s economy on the path of sustainable and balanced growth and increase per capita income. A decisive fiscal consolidation will help reduce public debt and build resilience while social spending will be expanded and the most vulnerable supported. A flexible, market-determined exchange rate will help to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks.

David Lipton, First Deputy Managing Director and Acting Chair, said, “Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth. In this context, the authorities’ programme aims to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyse significant international financial support, and promote strong and sustainable growth.

“A decisive fiscal consolidation is key to reducing the large public debt and building resilience, and the adoption of the FY-2020 budget is an important initial step. Achieving the fiscal objectives will require a multi-year revenue mobilisation strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by the provinces to support the consolidation effort, and effective public financial management to improve the quality and efficiency of public spending.

“Protecting the most vulnerable from the impact of adjustment policies will be an important priority. This will be achieved by a significant increase in resources allocated to key social assistance programs, supporting measures for the economic empowerment of women, and investment in areas where poverty is high,” he said.

“A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan’s (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability,” he added.

David said an ambitious agenda to strengthen institutions and remove impediments to growth will allow Pakistan to reach its full economic potential. “Addressing structural weaknesses in the energy sector and improving the governance of state-owned enterprises will ensure efficiency and better services, thus boosting economic activity. Moreover, improving the business climate, strengthening efforts to fight corruption, and enhancing the AML/CFT framework will create an enabling environment for private investment and job creation,” he said.

“The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the programme to achieve its objectives,” he said.

The authorities’ comprehensive economic reform programme, supported by the EFF, aims to stabilise the economy and lay the foundation for robust and balanced growth. Key elements include;

A decisive fiscal consolidation to reduce public debt and build resilience starting with the adoption of an ambitious FY-2020 budget. The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilisation by 4 to 5 percent of GDP at the federal and the provincial level over the programme period;

Expanding social spending including through the strengthening and broadening of safety nets to support the most vulnerable; A flexible, market-determined exchange rate to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks. This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank;

Energy sector reforms to eliminate quasi-fiscal losses and encourage investment, including by depoliticising gas and power tariff setting and over the programme period, gradually bringing the sector to cost recovery; and structural reforms through strengthening institutions increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.

Welcoming the IMF’s approval for $6 billion bailout package, Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh on Thursday disclosed that the government collected Rs70 billion tax through whitening of Rs3 trillion assets/income under the amnesty scheme.

The number of received declaration stands at 137,000 out of which 100,000 non-filers have now become part of tax system with the help of latest amnesty scheme. Dr Hafeez Shaikh also shared breakup of fresh foreign financing of $38 billion Pakistan is going to receive from the multilateral and bilateral creditors during the IMF programme period and stated that Islamabad would get $8.7 billion in shape of project financing, $4.2 billion as programme loan, $14 billion as rollover of loans and around $8 billion as commercial loans over next three years period.

“We welcome IMF’s approval for $6 billion package for Pakistan as none of the IMF’s board member opposed Islamabad’s request for this loan. We get the IMF loan at interest rate of 2 to 3 percent. The approval of IMF loan will help stabilising Pakistan’s economy,” Abdul Hafeez Shaikh said while addressing press conference here.

He said taxes will be collected from the rich and the poor will be protected. Flanked by Minister of State for Revenue Hammad Azhar and Chairman FBR Shabbar Zaidi, the adviser to PM on Finance Dr Hafeez Shaikh said that Pakistan would get first tranche of $1 under 39 months Extended Fund Facility (EFF).

On other hand, the IMF in its statement made it clear that strong financial assistance by Pakistan’s international partners will support the EFF. “The Fund-supported programme is expected to coalesce broader support from multilateral and bilateral creditors in excess of $38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years,” says the IMF.

However, Abdul Hafeez Shaikh said that Pakistan would get $2 billion on per annum basis under three-year EFF from the IMF. He said that the other multilateral donors resumed budgetary support for Pakistan and the Asian Development Bank (ADB) was ready to provide $3.4 billion out of which $2.1 billion would be provided within this year.

To a query, he said that they granted more autonomy to the country’s central bank. He said that the country paid back $9 to $10 billion on loan repayment in the last fiscal year and it was estimated that this repayment of loan would be standing at $11.8 billion during the current fiscal year.

After the press conference, the FBR Chairman Shabbar Zaidi said that the tax machinery obtained data of owners of 500 square yard from Punjab and Sindh and decided to send out notices in phased manner as the date of filing of returns was extended up to August 2, 2019. He said the industrial and commercial consumers who are non-filers will be served notices. He said there are total 341,000 industrial connections and 31,000 commercial consumers. He said all those who own over 1000cc vehicles will be sent out notices. He said the FPCCI demanded abolishing condition of CNICs and the government extended its deadline of one month so now it would come into force with effect from August 1, 2019.

Meanwhile, the IMF projected about pressing requirements of jacking up gross foreign currency reserves held by country’s central bank to the tune of $4.363 billion in the current fiscal year from $6.824 billion in last fiscal 2018-19 to $11.187 billion in 2019-20.

The debt servicing requirement is projected to be surged as it stands at 37.9 percent in last fiscal year 2018-19 which will be increased to 45.7 percent in the current fiscal year 2019-20. It demonstrates that the debt servicing is going to eat away more resources in the current fiscal year compared to the same period of the last financial year.

This projection should be seen in the context of IMF’s forecast that Islamabad requires whopping external financing of $38 billion under IMF programme period from all multilateral, bilateral, rollover of loans and approaching of international bond markets to generate dollar inflows during the programme period of the IMF. If need arises the State Bank of Pakistan might require purchasing of dollars from the open market for meeting reserves requirement on eve of quarterly or bi annually reviews under the IMF programme. Top official sources said that the first two reviews under the new IMF programme would be conducted on quarterly basis.

This projection indicates that the central bank will have to shore up foreign currency reserves both through debt and non-debt creating dollar inflows. The IMF has also projected that the budget balance (excluding grants) would be standing at 7.3 percent of GDP in the current fiscal year compared to 7 percent of GDP for the last fiscal year that ended on June 30, 2019. The PTI-led government had estimated that the budget deficit would be standing at 7.1 percent of GDP in the current fiscal year 2019-20.

The IMF has projected that the primary balance was estimated to remain at 1.8 percent of GDP in the last fiscal year and the government would slash down to bring it at 0.6 percent of GDP indicating that the government made fiscal adjustments of 1.3 percent of GDP for reducing primary balance in line with IMF conditions. The general government and government guaranteed debt including IMF obligation would go up from 79.1 percent of GDP in the last fiscal year to 80.5 percent of GDP in the current fiscal year. The external public and publicly guaranteed debt in percentage of exports would go up from 225.2 percent to 234 percent in fiscal year 2019-20.

With GDP growth of 2.4 percent and rising inflationary pressure to 13 percent on average in the fiscal year 2019-20, the IMF has projected that the consumer price index would be standing at 11.8 percent by end of the ongoing fiscal year.

The IMF showed that the poverty in Pakistan stood at 29.5 percent on the basis of 2012-13 while unemployment was 5.9 percent in 2013-14. The IMF projected that gross saving would be increased from 10.8 percent of GDP in last fiscal year 2018-19 to 12.1 percent in current fiscal year 2019-20.