AI: International Monetary Fund (IMF) uploaded the 11th review on its website, a review of great importance as a successful review (i) leads to the release of a subsequent tranche, (ii) indicates whether the agreed reforms are on target, and (iii) generates more assistance/resources from other multilaterals as well as bilaterals. The question that has arisen after the uploading of the eleventh review is whether independent economists support the conclusions of the 11th review or not? We have Dr Pasha as our guest today - an internationally acclaimed economist and professor. Dr Pasha, do you agree with the IMF assessment in the eleventh review about the state of Pakistan's economy?

HP: IMF in my opinion has presented an optimistic perspective for the economy 2015-16 as well as projection for 2016-17 and may be the motivation behind this is that as it is the second last review the Fund wanted to declare victory. The question arises whether there is a balance in the overall review? Though the Fund has given an optimistic perspective but they also highlighted many risk factors, including major external factors which can negatively impact on the economy and there is a need for discussion on these factors. The second thing is that the reform process has not been ended and the government must continue with the structural reforms after September, when the ongoing Fund programme ends, so that the growth process can be sustainable.

AI: Before we proceed, our viewers would like to know about the growth rate cited by the IMF, given that basic macroeconomic indicators' performance is related to the growth rate. The Fund has accepted a growth rate of 4.7 percent which the government has been claiming for quite some time. But you stated in our previous programme that the growth rate is 3.1 percent. Do you think that the upgrade in the Fund's assessment of the growth rate to 4.7 percent, which incidentally is still 4.5 percent on its website, can be challenged?

HP: At the start of fiscal year 2015-16 in the eighth review the Fund identified key demand variables that influence growth; and stated that with overall projected growth rate in investment of 8 percent and growth in exports of 2 percent GDP growth rate could be projected at 4.5 percent for 2015-16. However, at the end of fiscal year during eleventh review it was discovered that growth rate in investment was 5 percent instead of 8 per cent and growth in exports was negative by 9 per cent against the projection of 2 per cent. Despite the fact that key demand variables of growth in investment and exports did not materialize, the need was felt to increase the GDP growth rate to 4.7 percent from initial projection of 4.5 percent, which is not understandable. We would like to raise a question to the Fund to tell us whether there were other sources of growth which led to upward revision of growth target when key demand variables of growth in investment and exports did not materialize. This number, the growth rate, is very doubtful.

AI: If it is difficult to accept the growth rate, then what about other macroeconomic data? I am not talking about data collected by the State Bank of Pakistan, because its capacity to give exact figures of imports, exports, current account deficit has never challenged in any of the IMF reviews in the past. What has been challenged is the macroeconomic data presented by the government.

HP: The government has projected 4.4 per cent fiscal deficit in the revised estimates in budget documents submitted to the National Assembly.

AI: Before you breakdown the components of the fiscal deficit for 2016-17 I would also like you to highlight the reliance of our government on the Coalition Support Fund (CSF) as a revenue source and my question is what if the US Congress votes against releasing the CSF to us?

HP: There are serious problems in the context of relations with the US. The Finance Minister assumed that CSF inflows would be around Rs 170 billion for last fiscal year, the same amount is estimated for then ongoing fiscal year. However the IMF estimated Rs100 billion under CSF for balance of payment support. The difference or shortfall of Rs 70 billion was not noted by the IMF, which means that fiscal deficit would be higher by Rs 70 billion. If the commitment of Rs 170 billion inflows from CSF in the current fiscal year fails to materialize, fiscal deficit and current account deficit would increase.

The second issue of concern is that the while presenting the budget to the National Assembly, the government had stated that Public Sector Development Programme (PSDP) would be Rs 1390 billion but informed the IMF that PSDP spending would be Rs 1040 billion, which means a sudden and overnight slash of Rs 350 billion in the PSDP, which would impact on development and CPEC. This kind of misreporting must not happen with the government giving one figure to parliament and another figure to the Fund. If the budget document was used for the eleventh review then the government should stick to Rs 1390 billion. Sadly the difference in the current fiscal year is even greater of Rs 600 billion which is totally inappropriate.

AI: A note for our viewers. I would like to mention that it is clearly stipulated in the 11th review that the budget documents were submitted to the Fund and it was a prior condition for the release of the eleventh tranche. This implies that if the government did not submit the budget the tranche would not have been released and the 11th review would not have been declared successful. So may be this is the distinction the government is making between what it thinks is acceptable to Parliament and what is in reality. In reality PSDP always slashed.

One thing we can appreciate is the Fund's narrowing down of the assessment of the rupee appreciation. Previously the Fund had given a wide range - from between 5 to 20 percent - but in the eleventh review the Fund stated that real rate appreciation is 1.3 percent (y-o-y) in March 2016 and accumulatively was 19 percent over the past two years.

HP: The tenth review press note mentions 17 per cent overvaluation which was deleted the next day so the IMF has at least tried to identify risk factors on external account. Over valuation of rupee is a factor, which would further increase due to appreciation of the dollar. Growth issues in China and GCC countries would impact on Pakistan's exports as well as remittances. The IMF however has not mentioned as to what would be the impact of Brexit on Pakistan's economy and import of LNG.

AI: The IMF report states that the recovery in oil prices along with higher China Pakistan Economic Corridor (CPEC)-related imports, not CPEC investment but CPEC imports, will likely lead to a widening of the current account deficit to about 1.8 percent of GDP. How do you explain this logic?

HP: The IMF is not correct as imports for the energy sector under CPEC would be financed by Chinese banks and foreign direct investment would increase. It would of course be a loan based investment but it would cancel out so to state that it would impact on the balance of payment position is inappropriate.

AI: The IMF has confirmed the government's claim that flow of arrears in the energy sector are declining though stocks are stable. But the data in the eleventh review indicates that in 2014-15 the stock of arrears was Rs 313 billion whereas last year stocks rose to Rs 349.4 billion, or a rise of Rs 36.4 billion was registered in stocks while flows declined by Rs 12 billion only. Is the government engaged in placing some flows into stocks?

HP: NEPRA has finally released its state of the industry report. NEPRA is a regulatory agency of power sector and its job is to monitor all these things. As per 2014-15 figures released by NEPRA, the billing arrears for 2014-15 are Rs 130 billion, which is much higher than the figures presented by the IMF. It is massive, 11 per cent of the total billing.

AI: One review is left before the Fund programme ends which will take place by the end September as the government has taken an extension of a few weeks but two new structural benchmarks have been added at this late hour namely (i) to update the plan to further limit the accumulation of new payables, this is related to energy sector and gradually eliminate the outstanding stock of payable arrears by July 15, and (ii) to solicit expressions of interest for the divestment of Kot Addu Power Company (KAPCO): doable or not doable?

HP: The IMF and government admit that country's circular debt has reached a level of Rs 650 billion and there is no clear strategy on how to reduce this circular debt and this is off the budget debt.

AI: I have to close the program but I am going to invite you again because we have to discuss more about the 11th review and to discuss the state of the economy. I will be grateful if you will come for the next program.

Ladies and gentlemen as you heard Dr Pasha stated that a lot of the data that has been accepted by the IMF in the 11th review can be easily challenged. He also indicated that Fund Staff who designed this programme may have claimed a success as they wanted to declare a victory. Next week we will talk about the policy direction of the Fund programme, and whether it can be supported or not.