The International Monetary Fund (IMF) on its website referred to the Tokyo package of over 5 billion dollars as "a bridge towards a stronger medium-term revenue effort". The time period, constituting medium term, was not specified. However, this reflects a domestic consensus that the package is unlikely to be realised within the next quarter.
But what remains critical, according to the Fund, is for Pakistan to reinforce efforts to increase its tax-to-GDP ratio through tax policy and administration reforms. The Fund in its statement released on Tuesday on its website stated that "the slowing economy, additional donor support, and the need to protect priority expenditures" called for a 'relaxation' of the fiscal deficit target for 2009-10, as agreed between the Fund team and the government".
The IMF statement further said that it agreed to increase the 2009/10 fiscal deficit target to 4.6 percent of GDP, compared to the original target of 3.4 percent of GDP, to provide for additional spending associated with donor support (of up to 1.2 percent of GDP).
The IMF staff mission, led by Adnan Mazarei, visited Dubai over the past week to initiate discussions on the second review under Pakistan's SDR 5.169 billion SBA (about $7.6 billion) Stand-By Arrangement (SBA), approved by the Executive Board of the IMF on November 24, 2008. A first disbursement of SDR 2.067 billion (about $3.1 billion) was made on November 26, 2008, and a second one of SDR 568.5 million (about $847 million) on April 1, 2009, after completion of the first program review.
The statement said "The need to manage carefully expenditure was agreed, in particular to contain and eliminate poorly targeted subsidies, including those for electricity, while maintaining the life-line tariff to protect vulnerable groups".
It said: "While the external current account deficit has started to narrow and inflation has declined, the drop in the demand for exports and uncertainty regarding the prospects for workers' remittances pose risks to the external outlook". According to a recent monetary policy statement of SBP, from April to June 2009, the workers' remittances at $5.7 billion had shown an uncertain outlook. The report says that the remittances are likely to be affected, although the data so far shows them to be quite resilient.
IMF agreed that any cut in the discount rate of the State Bank of Pakistan (SBP) would be directly proportional to the decline in core inflation. "Looking ahead, given the persistence of inflation, the decision on any further cut in the SBP's discount rate will await a significant decline in core inflation", the statement said.
Regarding monetary policy, the markets have responded positively to the 100 basis points reduction in the central bank discount rate. The statement says, "Exchange rate policy will be managed flexibly to achieve the required adjustment of the current account and strengthen competitiveness. SBP interventions in the foreign exchange market will be largely aimed at achieving the program's net foreign assets targets".
The statement acknowledges, "Structural reforms have progressed broadly as envisaged in many areas. Electricity tariffs will be adjusted to eliminate tariff differential subsidies, legislative amendments to harmonise the income tax and general sales tax laws; a new draft SBP law has been prepared to increase the SBP's operational autonomy; and the authorities are preparing amendments of the banking law to improve the effectiveness of SBP enforcement powers. In addition, a plan to deal with the circular debt (inter-corporate debt in the energy sector) is expected to be finalised soon".
According to the statement, "The targets for the quarter ended March 31 have been met. The authorities and the IMF staff will continue their discussions on the 2009/10 budget and Pakistan's financing needs over the next few weeks to complete the discussions of the second review under Pakistan's SBA".
The statement says that Pakistan has remained on track to fulfil conditions under the IMF-sponsored program. According to the restrictions of IMF on the fiscal policy of Pakistan that were imposed at the time when the country entered in the program, fiscal deficit (excluding grants) is targeted to decline to 4.2 percent of GDP (Rs 562 billion) in 2008/09, from 7.4 percent in 2007-08.
The IMF has already restricted the government from pressing ahead with public financial management reforms, in line with fiscal ROSC recommendations. According to one of the conditions of IMF, the government's fiscal framework has to assume a further reduction in the fiscal deficit to2-21/2 percent of GDP by 2012/13. Also, it was being emphasised by the IMF that the fiscal consolidation would have to be supported by a strong tax effort, which would allow for higher spending in infrastructure and the social sectors.
It is learnt that the target to achieve 4.2 percent fiscal deficit by the end of 2008-09 has slipped. FBR needs to collect around Rs 401 billion in remaining two months (May-June) of 2008-09 to meet the target, which seems to be an uphill task for the tax machinery.
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