Sanchez tells ‘Paisa Bolta Hai’: IMF projections contingent on implementation of policies

ISLAMABAD: Adjust-ment in sequencing of the reform process under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme, emphasised by Dr Hafiz Pasha, is good but there is also a need to focus on institutions “for the rule of the game is governance”.

This was stated by Teresa Daban Sanchez, IMF Resident Representative to Pakistan, while speaking as a guest in “Paisa Bolta Hai” with Anjum Ibrahim on Aaj News. Former Finance Minister Dr Hafeez Pasha also participated in the show.

Sanchez stressed that the current programme belongs to the authorities and the Fund is only supporting them. “The programme can be as slow as they want, as long as they wish and as the Pakistani people want. Support by the IMF is for three years but the programme can continue if implementation by the Pakistani authorities continues. The reforms process is on a continuing basis because if you continue reforms, you continue to improve and adjust to new realities,” said Sanchez adding that after this programme if the authorities decided to continue, the IMF is there to provide its services.

Sanchez stated that the 2nd to 5th review of the IMF supported programme highlights the measures, calibrations, policy reforms and their sequencing, calendar and scope with the ambition being to adjust to the situations and challenges posed by Covid-19. The idea behind the calibrations is to continue implementation of the programme to achieve the goals that are needed in terms of tax reforms, power sector reforms and strengthening the institutions and to deal with other basic issues of the economy, she added.

Sanchez further said that the IMF’s projections of Pakistan’s economy are contingent on policies implementation, if policies are not implemented these projections are not going to happen.

Replying to a question about differences in growth projections of the Fund and government for 2020-21, Sanchez said that some times different agencies produce different data at different times and in different context which is easy to reconcile.

“We have the projection of 1.5 percent growth rate based on information available at the time of the review. Now we will have a new review which will be held in June and we will have more information. We will sit with our counterparts to put together our new macroeconomic framework following the upside risks and downside risks that would have been identified at the time the review documents would be put together,” she said adding that in most of the cases these differences disappear.

There is a need to be careful about the third wave of Covid-19 though the Fund thinking during the first wave was that Pakistan would suffer a very large negative growth. However if reform policies are implemented with consistency, Pakistan could go back to its growth potential. Growth needs to be inclusive, sustainable and maintainable for a longer period of time. “If policies are implemented with consistency and reforms momentum is maintained, Pakistan could go to its growth potential of 4 percent next year,” she added.

Sanchez further said that the power sector in Pakistan unfortunately has been put on edge for different reasons including mismanagement from the past, political interference, different measures of tariff adjustment and the situation today is very worrisome.

Circular debt stock is Rs2.5 trillion, she noted, and the bleeding continues which needs to be stopped. It is a burden on everybody - the economy, budget and financial sector. It is very different to create an environment conducive to investment and it is a threat to everybody. There is a need to plug and fix it in the medium term in a gradual way as Pakistan is facing multidimensional problems. Power sector reforms are not only about tariff, but also strengthening revenue as well as making sure that tariffs are in line with the cost determined by NEPRA as they know how to do that and they should be allowed to do so. Further reforms are aimed at reducing the cost of generation, improve the management of Discos and make sure that the most vulnerable segment of society is protected. The tariff right now is very regressive and most of the vulnerable people are not really protected, she proclaimed.

Dr Pasha said that the growth estimates for 2019-20 were finalised when actually the impact of Covid-19 first attack was not so severe. The Pakistan Bureau of Statistics (PBS) has based their estimates on data up to March 2020, he pointed out, and the worse happened after that.

“Our research indicates that GDP fell last year by almost 2 percentage points. The issue is if the level is now somewhat up the base being lower the growth level would be somewhat higher. I would not be surprised if we get 2.5 to 3 percent GDP growth,” said Dr Pasha, adding that there is an issue regarding the base number for 2020-21 and there is a need for updating these numbers.

Indications are very clear that the budget deficit would be on the right side of 8.5 percent of GDP and not 7.1 percent as projected however the good news is that while the government had budgeted $4 billion in the current account deficit it would be $2-2.5 billion this year, Dr Pasha said.

He acknowledged that tax reforms and the circular debt are very serious issues. The reform process has been clustered too much and there is a need for sequencing it skilfully so that the country has the implementation capacity as well as the political strength to be able to implement it at least cost.

Pasha suggested implementing the most progressive part of the income tax reform. Quoting UNDP research, Pasha said that there are major gaps which can be filled up very quickly. After that there is a need to move on to complex issues of sales tax reforms. On the power tariff issue Pasha said that lumping it into a period of three months, would have a big shock on exports and industry. “My suggestion is that while we do need to raise tariffs perhaps it can be spread out over 2021-22,” he added.

Sanchez emphasised the need to focus on institutions “for the rule of the game is governance. It is important to have a plan for reduction of circular debt and have a new Nepra act - the regulatory body that makes decision and not allow political interference. This is what Pakistan needs - a better foundation for policy making for the future and this way people will be happy because they would have predictability about how things are going to be done.”

Replying to a question about Fund engagement with the opposition parties Sanchez said that the Fund tries to reach out to as many stakeholders as possible. Currently due to Covid-19 it is not possible to travel adding that the Fund is here at the disposal of all stakeholders.

Pasha concurred with the need for fiscal and financial discipline in the system however he noted two important considerations. First there is need to recognise the constitutional supremacy of the National Economic Council (NEC) which is the primary body for deciding targets in the annual plan. Inflation and growth targets ought to be set by the NEC which is chaired by the Prime Minister and to set targets in a collective capacity. Governor State Bank sits on the council as well.

Pasha agreed with the proposed State Bank of Pakistan amendment draft that Secretary Finance Division should cease to be a member of the SBP Board so that the State Bank has more operational autonomy but added: “I was very particular about the establishment of fiscal and monetary policies coordination board. This board will need coordination between the two policies and if there is an issue of hierarchy maybe we can have the two as co-chairpersons but we need to have fiscal and monetary policies coordination board. Further there is a need for an explicit statement of accountability of SBP to the national parliament particularly quarterly and annual reports must be looked at by the finance committee and the normal accountability process should apply to senior officials of the SBP. So yes more autonomy but within a sensible operational limit.”

Copyright Business Recorder, 2021