Two revisions to the IMF program have been made in the first review: inflation is slightly lower in part because some of the pass-through from the exchange rate adjustments has been more moderate than anticipated, and some adjustment have also been made to the export-import composition of the current account, but without any major substantial changes in the total current account deficit share of GDP that they expect to see this year.
This was stated by Ernesto Ramirez Rigo, Mission Chief for Pakistan, Middle East and Central Asia Department while addressing a conference call on the release of the IMF Staff Report on the First Review under the Extended Fund Facility Arrangement for Pakistan.
He further clarified that the fiscal side is "an area where it's not just about the improvement on the total - on the headline number on the fiscal headline number, it is about the quality. But they want to be very mindful to minimize the impact of the adjustments on economic growth this is why we also put the emphasis on tax revenue rather than expenditure, which normally comes with larger multipliers."
"We calibrated that very carefully, but we want to see more tax revenue mobilization, and that's an area which is not easy, it's very tough, there are many political and economic issues around that. And that's where we think it's an area of concern that we should continue to make progress there," he added.
He further said the design of this program is based on tax revenue mobilization and not so much on reducing expenditures. This strategy is because their assessment is that Pakistan is still lacking in the area of development spending, such as infrastructure, and they feel that it is very important that fiscal space is created to meet this development needs.
Rigo said that program implementations have been on track for the first review. All the performance criteria for the targets of the first quarter were met or exceeded, in particular those on the external sector, foreign currency reserves and net domestic assets (NDA), likewise on the fiscal side.
He further said the economic outlook remains unchanged relative to what was at the time of the program approval and within the deceleration of economic activity as was expected at the time of program approval.
Beyond that what really matters is that the first review, or like any other review of a Fund program, requires two components. One, is what the performance criteria for the quarter and secondly, and more important, is the forward-looking component in terms of the policies that the authorities are committed to, he added.
Rigo said that the authorities remain strongly committed to all the objectives of the program. They are now at the stage in the program where they move to the area of structural reforms. These are really important to build an institutional framework for the country so that there is no repetition of the boom bust cycles of the past.
"I would like to highlight three areas where we think it is important that things continue to progress. One, the quality of the fiscal adjustment, while we have already started to see improvements on the fiscal accounts, it is very important that this improvement is based on better underpinning for it to be permanent. And that will require continued work on the tax revenue side, rather than just on total revenue increases, or containing expenditure", Rigo added.
He added that the quality of fiscal adjustment will start to have a larger and larger focus in the program. That will of course include tax policy reforms, something that will be of relevance for the following year's budget.
Another structural area which supplements the fiscal adjustment, is tackling the issue of circular debt in the energy sector. The authorities have put together a comprehensive strategy to address the flow and now this strategy has started to be implemented, that will be the purpose for our forthcoming reviews," Rigo added.
There is also a need for the NEPRA legislation that is regulators for the energy sector, to have more automaticity and the capacity to implement when necessary to support the reduction in circular debt. That's something that is a benchmark for the end of December, and we look forward to look at those reforms. And of course, very important to us, is the independence of the Central Bank, the legislation now is a structural benchmark for March.
This was originally set for the end of December 2019, but our technical team in the Legal Department, after looking at the necessary changes, and in consultation with the authorities decided to spend some more time working on this to provide technical assistance, and we set the benchmark so that it would be more feasible, and still very ambitious, but more feasible.
Rigo said so far there has been a major improvement in the external position of Pakistan that was one of the objectives of the program. A very smooth transition to market-determined exchange rate, it was also a major component of the program. So those are areas where they feel that the program is delivering very good early results.
Rigo said there were no delays of any kind, between the Staff approval in November, and the Board approval just last week, "It's just simply the process, the time that it takes internally in the Fund to get the documents to the Board. And just so that everybody understands, following the staff-level agreement which is between the staff and the authorities, we have to prepare the documents which go through an internal review process that normally takes about a couple of weeks to be completed once management approves. It would be at that moment in which management says it's okay to do everything that is presented to them. Then the document is issued to our IMF Board, which requires a minimum circulation period of two weeks. So that gives you an idea of the time frame that it takes to produce these documents. They manage to get to Board on December 19 was pretty good time considering all our internal processes."
Copyright Business Recorder, 2019
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