ISLAMABAD: The International Monetary Fund (IMF) Fund has advised Pakistan to reduce fiscal deficits, restore public debt sustainability, reform the energy sector, allow more exchange rate flexibility, enhance SOE governance and generate higher and sustainable growth.
This advice was titled under Pakistani authorities’ implementation of past Fund advice in documents uploaded on the Fund website on Saturday further stating that implementation of past Article IV recommendations was generally weak and the government renewed its commitment to this agenda supported by the EFF program, despite some delays and policy slippages since the start of the COVID-19 pandemic.
The Fund's advice centered on tax revenue mobilization to underpin medium-term fiscal adjustment and ensure fiscal sustainability, with a focus on reducing tax concessions and exemptions, strengthening the collection of provincial taxes, and more efficient tax administration.
Staff advised the federal and provincial authorities to better align revenue and expenditure responsibilities to strengthen the intergovernmental fiscal framework as well as step-up social safety nets by broadening population coverage under the main unconditional cash transfer program (Benazir Income Support Program, BISP) and increasing educational transfers.
Pro cyclical fiscal policies, mostly due to renewed tax concessions, led to a surge in the fiscal year 2018 and 2019 fiscal deficits and public debt, financed with central bank borrowing.
Under the program, the authorities are stepping up tax revenue collection efforts, including by avoiding new preferential tax treatments or exemptions and reforming tax policy to simplify and streamline.
In that context, the authorities have advanced corporate income tax (CIT) reform, while further reforms to general sales taxes (GST) and personal income taxes (PIT) have stalled.
Social safety nets are being expanded, with greater resources being allocated to women and children, and the authorities’ recently finalized update of the BISP beneficiaries’ database with coverage of 33 million households
Fund advice included maintaining a prudent monetary policy stance, with positive real interest rates, rebuilding external buffers, and allowing greater exchange rate flexibility. Staff also called for greater State Bank of Pakistan (SBP) independence and reducing government borrowing from the SBP.
Financial sector policy recommendations focused on strengthening the sector’s resilience to ensure that undercapitalized banks are regulatory compliant and ensuring effective implementation of the regulatory and supervisory framework, including strengthening AML/CFT effectiveness to support exit from the FATF grey list. In the run-up to the current program, a de facto fixed exchange rate, supported by sizeable forex interventions, contributed to a build-up of external imbalances.
Interest rates were kept low to support consumption- and import-driven growth, while the government increased its borrowing from the SBP.
Ahead of program approval in July 2019, the SBP transitioned to a market-determined exchange rate and raised the policy interest rate to be positive in real terms. However, the COVID-19 shock required a reversal of monetary policy to aid the economy, while preserving the exchange rate flexibility under very difficult circumstances.
Under the program, external buffers are being rebuilt, supported by the current account adjustment, and inflation is starting to stabilize.
The authorities are taking action to strengthen the independence of the central bank, including the submission to parliament of amendments to the SBP Act in consultation with IMF staff, and have not extended credit to the government since the program came into effect.
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Two small private sector banks are undercapitalized, and the authorities are committed to strengthening and modernizing the bank resolution and crisis management frameworks.
Fund advice focused on ensuring a financially sound energy sector by addressing circular debt and strengthening the regulatory framework, restructuring SOEs to improve efficiency, and boosting the business climate as well as governance and anti-corruption frameworks to support private investment and job creation.
However, lackluster progress in structural reforms has hampered investment, allowing inefficient SOEs to linger, and a large informal economy to remain.
Increases in power and gas tariffs have been insufficient to stem the accumulation of quasi-fiscal losses.
The authorities approved amendments to the NEPRA Act, introducing automaticity in the notifications of the determined tariff changes, and just recently caught up with passing through pending power tariff adjustments. In terms of SOE reforms, the authorities undertook a triage in 2020 to examine the functions and financial performance of individual SOEs and identify which to (i) retain under state ownership; (ii) restructure; or (iii) privatize.
They have also prepared a new SOE law to improve governance and transparency in the sector in line with IMF staff advice, but it has not been approved by parliament. Major shortfalls remain in taking anti-corruption and good governance actions, including in establishing a robust asset declaration system, and in ensuring transparency around COVID-related spending and procurement.
Copyright Business Recorder, 2022
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