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Sohail Sarfraz

Business Recorder

Published Date: Dec 25, 2019

Fiscal consolidation aimed at keeping debt at sustainable level: Sanchez

Resident Chief of International Monetary Fund (IMF) in Pakistan, Teresa Daban Sanchez said on Tuesday that fiscal consolidation is aimed at keeping the debt at sustainable level.
Addressing a seminar organized by Sustainable Development Policy Institute (SDPI) here, she said that the IMF program has three key pillars including fiscal consolidation to keep debt at sustainable level, placing market determined and flexible exchange rate, and protecting vulnerable through social safety nets.
She said, “The debt continues to be sustainable as the debt sustainability analysis (DSA) done by the IMF staff was accomplished with minute details."
She said that the inflation is considered heavy tax and burden for the poor and inflationary expectations are still moderate. Although inflationary pressures have started receding yet they are still on higher side as the IMF projects inflation in the range of 11.8 percent for the current fiscal year.
She said that the poverty figures would be estimated by the government of Pakistan during 2020. She said that the upcoming review mission of the IMF would hold detailed deliberations on Sustainable Development Goals (SDGs) and would put number to ascertain how much resources Pakistan requires to achieve the desired goals under the SDGs’ targets.
“The IMF program is aimed at gains achieved as permanent so the program targets have been modified to ensure stability and then move towards higher growth trajectory," she said.
She said that the GST harmonization is a must for Pakistan because lack of harmonization is increasing cost for doing business in Pakistan. The coordination among provinces is necessary as provinces should have objective of increasing their own collections including sales tax.
“The IMF is not directly involved in discussions between the federation and provinces on harmonization of taxes, but the Fund is assisting, helping and advising them to achieve the objective", she said.
She said that the imports are going down, but interestingly imports of machinery and equipment are not going down. This is affecting tax collection of the FBR, she added.
She said that large scale manufacturing is very important, but it only covers 15 percent of the GDP.
She said that the revenue collection should be increased through good tax reforms and not by increasing taxes. In June 2019 at the time of budget, the government removed discriminatory/exemption SROs. The projections for revenue collections were ambitious keeping in view massive impact of these SROs on revenue. The expected revenue from the removal of SROs was big. “But the imports are compressing much faster than we thought. The projection of revenue target has included this correction. With the current policies, legislation and faster decrease in imports, the revenue collection target of the FBR is challenging. But we will judge revenue collection performance on quarterly basis during the reviews of the staff mission," she said.
The Debt Sustainability Analysis (DSA) on Pakistan’s debt situation done by the IMF staff states that public debt for FY 2019 turned higher than projected, but public debt continues to be projected to decline as broadly envisaged at the time of program approval. Public debt (including guarantees) is now estimated at 87.8 percent of GDP at end-FY 2019, compared with program approval of 78.5 percent of GDP. This is because of the larger fiscal deficit, a decision to increase cash deposits to provide a financing cushion against potentially unfavorable market conditions, and a more depreciated exchange rate. Total debt is projected to decline to just below 70 percent of GDP by end FY 2024, compared with 67.1 percent of GDP at the time of program approval. Gross financing needs edged up to 19.4 percent from 163/4 percent at the program approval, reflecting the higher deficit and gross financing needs in FY 2019 but they continue to be on a clear downward path.
According to a press release of SDPI issued here on Tuesday, International Monetary Fund’s (IMF) Resident Representative for Pakistan, Ms. Teresa Daban Sanchez* on Tuesday while clarifying misunderstanding around the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF) said that Pakistan’s overall macro-economic performance remained satisfactory where revenue collections have increased substantially and there is improvement in the trade deficit and net foreign assets. However, slower economic growth and failure to get out of grey-list by FATF remained major risks to the program.
She said this during a *conversation with relevant stakeholders on first quarterly review of 39-month arrangement made under the EFF for Pakistan organised by the Sustainable Development Policy Institute (SDPI)* here at Islamabad. Teresa Daban said that though inflation has started to stabilize but food price inflation continues to be a major concern. Owing to stabilization policies of the government, public debt, although at a high level, continues to be sustainable, she added.
Teresa Daban said that there was a successful transition towards a market-based exchange rate regime by the government which helps increase foreign exchange reserves. The government was also successful in controlling expenditures with the help of new public finance management law and avoid borrowing from the central bank. However, economic activity was softening as the economy adjusts to a new stabilisation policies, she added.
Teresa Daban while highlighting risks to the program sustainability said that slower growth could undermine the program’s fiscal consolidation strategy and opposition to institutional reforms, which may result in stagnant economic growth and hamper the population to benefit from the reforms. Moreover, failure to get out of grey-list by FATF could have implications on capital inflows to Pakistan. Owing to lack of a majority by the ruling party in the upper house, provinces may underdeliver on their surplus commitments, she added.
“The authorities’ steadfast commitment to the program and decisive policy and reform implementation could help mitigate these risks," she said adding close monitoring, with quarterly reviews, which allow for adjustment and improvements coupled with strong support by the international community, in the form of financial assurances and continue calibration and potential scaling up of social spending can help tackle the risks and faster recovery.
Daban Sanchez said that as per Memorandum of Economic and Financial Policies (MEFP) the government is committed to strengthening the tax administration and advancing the tax policy by eliminating exemptions by the FY2021 and a joint working group on harmonization of GST (end-March 2020). Moreover, under MEFP the government will improve the governance of state-owned enterprises (SOEs) through privatization of two LNG plants by end FY2020 and published audits of PIA and PSM-Pakistan Steel Mill (end Dec 2019) coupled with new SOE legal framework and triage of SOE, both by end Sept 2020.
Regarding poverty reduction and social protection actions as envisaged in MEFP, the authorities are committed to higher spending by expanding PKR 180 billion BISP allocation and better targeting by updating the National Socio-economic Registry (NSER) (end 2020).
While responding to a question, Daban Sanchez clarifies that the IMF does not dictate economic policies of the government, instead IMF help the government in providing technical support in order to take the right decisions.
*Executive Director, SDPI, Dr Abid Qaiyum Suleri* said that despite positive first quarterly performance review by the IMF, there was so much misunderstanding and negativity on our national media around the first review of the IMF. He said that the purpose of holding this conversation with relevant stakeholders was to clarify those misunderstanding and negativity around the first performance review. This program and its review will be determining the way forward and the short-term, medium-term and long-term vision of the government with regards to the economic policy making for Pakistan, he added.