The International Monetary Fund (IMF) has explicitly stated that Rs 40 billion revenue shortfall for the first quarter of the current year has to be bridged through new taxation measures as a pre-tenth tranche release condition. Harald Finger, Mission Chief for the $6.64 billion Extended Fund Facility during an interaction with the local media here on Friday, a day after the joint press conference with Finance Minister Ishaq Dar, stated that "measures of the deficit amount would be taken to bridge the underperformance as prior action".
Finger said Pakistan''s foreign exchange reserves have increased as import bill and oil prices have come down and it is unfair to say that all these are built through loans; however, he was skeptical about the reserves sustainability in the presence of possible structural problems/challenges posed by declining exports and foreign direct investment.
Finger said the Pakistan rupee was overvalued by between 5 to 20 per cent. "The IMF model shows that rupee was overvalued by 5 per cent to 20 per cent in real term exchange rate," he said, adding that power sector circular debt has mounted to Rs 335 billion parked in power holding company and Rs 326 billion payable to power sector by end September 2015.
Finger said there were no discussions with authorities regarding power tariff increase. However, he did not respond to a query on future reduction in power subsidy but added that "on the power sector we have under the programme a quarterly target on accumulation arrears/circular debt which the government has to bring down. The government is in agreement with the World Bank, Asian Development Bank and the IMF to bring down circular debt. The government has quarterly targets and September''s target has been met with a substantial margin. The new accumulation of circular debt will be much below what we thought it would be," he stated.
The IMF has discussed prior actions with the Pakistan authorities and these are going to be taken before going ahead for the next review, Finger stated. He expressed skepticism over the sustainability of foreign exchange reserves in the presence of structural problems that account for a decline in exports and almost non existent foreign direct investment.
Finger said he had no evidence of manipulation of economic data but added that there is regular interaction with authorities to improve the data. The government is constantly engaged in data improvement and some progress in broadening coverage has been made, he said. As a result of broadening of coverage, the fiscal deficit for the last fiscal year was marginally increased. Resident Head of the IMF Mirzoev added that "unless losses of circular debt are absorbed in the budget expenditure, they can not be taken as part of the fiscal deficit".
Responding to a question on the IMF''s assessment of Pakistan''s investment environment as being positive when all the indicators including exports and FDI have been showing negative growth, Finger said that there was a mixed trend with "some indicators going up and some going down". He said Large Scale Manufacturing, oil prices and new investment from China through the China-Pakistan Economic Corridor (CPEC) are contributing to a favourable investment climate whereas FDI and exports, etc, are going down.
About textile and agriculture packages, he said it was the government''s prerogative to decide about sectors in terms of spending but the IMF would look at the expenditure in terms of the overall fiscal deficit framework. Finger added that there was considerable economic stabilisation in recent years as fiscal deficit has been significantly reduced, foreign exchange reserves have improved and power sector issues are being addressed and now the government needs to put in place policies for higher economic growth.