ISLAMABAD - Pakistan’s investment and growth would continue to be hampered by delays in implementing key policy reforms, terrorist threats, street violence and urban criminal activity as the upcoming withdrawal of coalition forces from Afghanistan may have negative spillovers on security in border region.
“Delays in the implementation of the reform agenda would impede investment and weaken growth prospects. Investment and growth continue to be hampered by terrorist threats, street violence, and urban criminal activity. The upcoming withdrawal of coalition forces from neighboring Afghanistan may have negative spillovers on security in the border region, said the International Monetary Fund (IMF)’s Staff Report on Pakistan.
The IMF’s Staff Report was presented in the Executive Board’s consideration on June 27, 2014, following discussions that ended on May 12, 2014, with the officials of Pakistan on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility. The IMF’s Board meeting approved fourth tranche worth of $555.9 million for Pakistan. The report highlighted the economic situation till March 2014. The Fund once again reiterated that Pakistan’s economy grew by 3.3 percent against the government’s claim of 4.1 percent for the previous financial year 2013-14. Similarly, the country’s economy would grow by 4 percent against the government rate of 5 percent during ongoing fiscal year 2014-15. “SBP reserves have improved, boosted by bilateral inflows, including grants, Eurobond issue by the government, and official disbursements from development partners. These inflows contributed to an appreciation of the rupee by almost 7 percent against the dollar during the third fiscal quarter despite accelerated spot market purchases by the SBP. Despite these developments, the reserve position remains insufficient, covering less than two months of imports”, maintained the Report.
The Report also stated average inflation is expected to reach about 8.8 percent in FY2013/14 before easing to around 8.1 percent next year, as inflation expectations will be anchored by prudent monetary policy and sustainable fiscal policy. The government has set budget deficit at 4.8 percent of the GDP. The consolidation is underpinned by tax policies that aim mainly to increase the tax base, including the initial steps to eliminate concessions granted through SROs and a further hike in the Gas Infrastructure Development Cess (GIDC) of around 0.2 percent of GDP. While tax revenue measures, at about 0.8 percent of GDP, remain in line with the effort envisaged under the programme, the lower revenue base (due to the underperformance in FY2013/14) will produce a lower tax-to-GDP ratio than envisaged in the programme. Nonetheless, the remainder of 3G licence receipts and a new 4G auction will compensate for this shortfall. The authorities are committed to additional permanent tax measures in FY2015/16 to further raise the tax-to-GDP ratio. On the expenditure side, the budget envisages that current spending will remain contained-including by further reducing electricity subsidies-in order to provide space for a stronger increase in capital spending and for a further significant increase in targeted support for the poorest under the Benazir Income Support Program (BISP).
According to the Report, the government has planned to submit amendments to Anti-Money Laundering Act (AMLA) to Parliament by end-September 2014 (structural benchmark). In addition, by end-June 2014, the FMU should provide proper guidance to assist financial institutions and the FBR to detect abuse of the investment incentive scheme. The tax revenue performance in April suggests a significant shortfall from the original programme objectives. Moreover, revenues from 3G licences were also lowered than projected, which reduced non-tax revenues by about 0.15 percent of GDP. To address these shortfalls, the authorities are expected to continue to contain current spending to deliver savings of about 0.15 percent of GDP-mainly in non-energy subsidies and untargeted grants. The lower tax revenues entail lower transfers to the provinces, which will have to reduce provincial current and capital spending to comply with agreed targets and generate additional savings. Provincial under spending which has been the norm in recent years-could fully cover the remaining fiscal shortfall to meet the year-end deficit target while providing room to avoid further reductions in the federal capital spending.
According to the Report, the authorities continue with their plans to bring electricity tariffs to cost recovery levels. The National Electric Power Regulatory Authority (Nepra) finalised the FY2013/14 determination of electricity tariffs. Despite, lower fuel cost and reduced technical and distribution losses translating into lower determined prices. Nepra’s notification implied an increase in electricity tariffs by on average 4 percent, while eliminating subsidies on industrial, commercial, bulk, and residential consumers above 200kWh of monthly consumption. This tariff adjustment is expected to reduce the electricity subsidies to 0.5 percent of GDP in FY2014/15 from around 1 percent in the previous year.
The IMF also proposed four new structural benchmark including steps to improve the SBP’s internal operations, Filling the vacancies in the Nepra Board (end-July 2014), Offering minority shares in UBL and PPL to domestic and international investors (end-June 2014); and approving an administrative order to consolidate the responsibilities of public debt management in the debt management office (end-September, 2014).

Meanwhile, two structural benchmarks are to be modified: The benchmark on SRO reduction will be clarified to include in the FY2014/15 budget the elimination of tax exemptions and concessions granted through SROs for an amount consistent with the fiscal deficit reduction objective. The date for the submission of deposit insurance legislation will be modified to allow more time for technical assistance on the draft.