Pakistan Tehreek-e-Insaf (PTI) government's focus should be on convincing the International Monetary Fund (IMF) on homegrown reforms agenda and reduce external dependence, according to Arif Habib Limited's research report 'Pakistan Investment Strategy 2019' released Wednesday.
The report said the country's entry into the IMF program would build confidence of all stakeholders, including multilateral institutions - ADB, World Bank, and others - for Sukuk and Eurobond issuance and investors interested in investing in Pakistan.
It said that negotiations with the IMF are under way for a bailout package and after a successful agreement, the approval will be taken to the Board of the IMF, where the US has a 16 percent voting right. Currently, bilateral relations between Pakistan and the US have room for improvement, and it seems that the conditions for Pakistan's entry into the IMF program are contingent upon that.
Nevertheless, Pakistan's focus should be on convincing the IMF on homegrown reforms agenda and reduce external dependence. The MoF estimates the cost of borrowing via Sukuk and Eurobonds will reduce by 1-1.5ppts if Pakistan enters into an IMF program.
The report highlighted some challenges that are free-float of PKR against the USD implying additional devaluation of 5-7 percent and 100-150bps increase in interest rates. Complete cost recovery from customers for utility bills like gas and electric (this could be achieved via reduction in line losses and UfG however, this would take a long time and prices would have to be increased until then).
It said that country's electricity and gas tariffs are already higher than other regional countries thereby affecting the competitiveness of exports as well as import substitution industry. To recall the government has already raised gas tariffs by 33 percent and approved an electricity tariff hike of 12 percent, while exempting export-oriented industries from the recent price increase.
The report said that lower Fiscal Deficit, higher revenues via increase in indirect taxation such as through increase in GST to 18 percent. Minimization of losses from State Owned Enterprises can either through reform or privatization.
The AHL has underscored the need of broadening tax base by enhancing documentation of the economy for the country's economic revival.
Also, it has called for attracting foreign investment in exporting industries via establishment of Special Economic Zones.
AHL urged the government to reduce losses in State Owned Enterprises through reform and restrict government's role in business by divestment from government owned entities. Increase value added exports by providing inputs at competitive prices and improve labor productivity via provision of vocational training. Support import substitution industries.
The government should take steps to encourage remittances through formal banking channels. Check abuse of Afghan Transit Trade, renegotiate Free Trade Agreements as well as control under invoicing of imports and exports to protect local industry.
Further improve energy mix towards low cost energy and reduce the basket price of electricity via focusing on indigenous sources of energy like Thar Coal, wind and solar power. Control Transmission and Distribution (T&D) losses for electricity and Unaccounted for Gas (UfG) losses for gas distribution companies to reduce the cost of gas and electricity. Improve Ease of Doing Business, whereby undue regulations and delays have put Pakistan at 147th rank, compared with 100th rank of India and 111th rank of Sri Lanka.