ISLAMABAD - The IMF has asked Pakistan to withdraw tax concession, impose new taxes and introduce additional electricity surcharges ahead of upcoming general elections and the annual budget.

“Despite the pre-election period, staff [of International Monetary Fund] recommended complementing the positive revenue performance with an early introduction of additional measures to contain this year’s budget deficit to 5 percent of GDP (5.4 percent underlying deficit excluding one-off operations)” it has said.

In its report released after completion of the first Post-Program Monitoring (PPM) discussions, the international financial intuition gave the rationale for these measures saying, it was “to partly undo last year’s overruns, support efforts to contain import pressures, and strengthen debt sustainability”.

The Fund recommended reduction in concessions and exemptions (0.3 percent of GDP), raising of petroleum taxes, withholding taxes and excises (0.1 percent of GDP), and containing current expenditure (0.1 percent of GDP).

It also recommended considering additional electricity surcharges to facilitate cost recovery until the underlying structural issues are tackled.

The IMF welcomed government’s intention to notify revised electricity tariffs, which “would help contain the build-up of power sector arrears”. It urged faster implementation of other components of the circular debt reduction plan.

It also welcomed government’ plans to revisit the current cross-subsidisation arrangements and notify higher tariffs in the gas sector to ensure adequate cost recovery.

The global lender also emphasised the urgency to arrest losses by Pakistan International Airlines (PIA) and Pakistan Steel Mill (PSM).

It noted that the government has expressed hope that a new plan to restructure and seek private participation in PIA would help improves its financial performance. “They [Pakistan government] are also actively considering options to privatise PSM,” the report further said.

Projections for next

financial year

The IMF has estimated Pakistan’s GDP growth at 5.6 percent for FY2018 due to continued implementation of CPEC, operationalisation of new power generation capacity, sustained recovery of agriculture, and strong consumption growth.

In medium term, the country’s growth is expected to moderate to about 5 percent, reflecting declining energy sector investments, moderating confidence, and continued structural reform challenges, although there are significant downside risks if external and fiscal imbalances are not swiftly addressed.

The current account deficit is expected to widen to $15.7 billion (4.8 percent of GDP) this year. In the medium term, the current account deficit is expected to remain elevated at about 3.8 percent of GDP, owing to continued real exchange rate misalignment and slow recovery of remittances.

On current policies, and based on the authorities’ ambitious external financing plans, gross international reserves are expected to further weaken to $12.1 billion (2.2 months of imports) this year, with risks skewed to the downside. Reserves are expected to continue declining in the medium term.

The budget deficit is projected to reach 5.5 percent of GDP this year. Stronger tax revenue (12.9 percent of GDP)—owing to robust import growth, higher oil prices, the recent exchange rate depreciation, and imposition of regulatory duties—and lower interest expenditure are expected to provide a moderating effect on the deficit.

In addition, the authorities’ decision to restrain the budgeted surge in development spending and to closely coordinate with the provinces to maintain fiscal discipline will be helpful, the report said.

But it warned that demands for higher spending in the pre-election period could raise the fiscal deficit, including at the provincial level. “That said the pre-election period could pose significant risks to maintaining fiscal discipline.”

Over the medium term, quasi-fiscal losses and arrears by PSEs are expected to persist and the fiscal deficit will likely remain elevated, at around 5.8 percent of GDP, as growing interest expenditure and Public Sector Entities (PSE)’s subsidy requirements would be counterbalanced by improvements in revenue collection.

A more gradual deceleration of imports and slower recovery of exports and remittances could further widen the external deficit.

 

 

External financing challenges

External financing needs are expected to rise from $21.5 billion (7.1 percent of GDP) in FY 2016/17 to around $45 billion by FY 2022/23 (9.9 percent of GDP). External financing are estimated to enhance due to elevated current account deficit and rising external debt service, in part driven by CPEC-related outflows (loan repayments and profit repatriation).

Tightening global financial conditions and changing investor sentiment could complicate mobilisation of external financing, particularly if external and fiscal imbalances are not proactively addressed, eroding confidence, private investment, and economic growth.

Deterioration in security conditions could also negatively affect investment. Lower growth in key trading partners or further appreciation of the real effective exchange rate could accentuate these trends.

Furthermore, continued scaling up of CPEC investments could accelerate the buildup of related external payment obligations.

In IMF’s downside scenario, based on partial materialisation of these risks, Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves and significant implications for economic growth.

The IMF has welcomed the State Bank of Pakistan (SBP)’s move to allow adjustment of the exchange rate, and emphasised the importance of continued exchange rate flexibility going forward.

Public debt excluding guarantees is projected to stay around 66-67 percent of GDP. In the absence of strong consolidation measures, the fiscal deficit excluding grants is expected to remain at close to 6 percent of GDP through the medium term, resulting in elevated debt levels. Adverse shocks, notably to economic growth and the primary balance, could lead to public debt ratios well above 70 percent.

The Fund advised Pakistan to unwind the increased government borrowing from the SBP, which would support monetary tightening. Going forward, greater exchange rate flexibility will need to be accompanied by further adjustment of the policy stance as well as strengthening of the interest rate-based monetary policy framework with appropriate intermediate and operational monetary policy targets, and a clear limit to FX interventions.

 

 

IMF advises ‘clampdown on people’s pockets’