The $6 billion loan package for Pakistan approved by the International Monetary Fund last week will require "very ambitious" fiscal measures and sustained commitment for the bailout to succeed, IMF officials said on Monday. The three-year agreement approved by the IMF board last week, Pakistan's 13th bailout since the late 1980s, has seen a sharp drop in the value of the rupee currency after the central bank agreed to a "flexible, market-determined exchange rate".
It also foresees structural economic reforms and a widening of the tax base to boost tax revenues that are currently estimated to account for less than 13% of gross domestic product (GDP) by 4-5 percentage points. With slowing growth, a budget deficit which has climbed to more than 7% of GDP and currency reserves of less than $8 billion, or enough to cover 1.7 months of imports, Pakistan has teetered on the edge of a debt and balance of payments crisis.
Ernesto Ramirez Rigo, the Fund's mission chief for Pakistan said the programme targets were tough but Prime Minister Imran Khan's government, which came to power last year vowing not to turn to the IMF, was committed. "We certainly think that debt sustainability under the programme will be assured," he told a conference call with reporters, adding that it would require "very ambitious" fiscal consolidation, mainly through improved revenue collection.
Pakistan has a notoriously narrow tax base, with less than 1% of its 208 million population filing income tax returns, a vast informal economy and several key sectors of the official economy largely exempt from tax. The IMF loan and the associated package of reforms that goes with it will unlock another $38 billion in loans from other international partners but commitment by Pakistani authorities in pushing through reform was essential, Ramirez Rigo said.
"Consistency and sustained implementation is key." The 2020 budget, passed last month, approved tax measures worth some 1.7% of GDP to help cut the deficit and Pakistan has promised a multiyear effort to overhaul its tax and budget system to put its public finances on a firmer footing.
A central part of the programme will involve cleaning up accumulated debts in the power and gas sectors and in loss-making state enterprises including Pakistan International Airlines, Pakistan Steel Mills, and Pakistan Railways. Losses built up in the power sector now amount to the equivalent of 4% of GDP, posing a serious fiscal risk, while losses in the big three state enterprises amount to 2% of GDP, the IMF said in a report on the package.
The tough conditions of the package, which has already seen interest rates hiked by 150 basis points and which will see a raft of tax loopholes closed, has already drawn resentment among households facing inflation running at around 9%. Ramirez Rigo said there was a risk that the difficulties of implementing some of the policies in the package were "more complicated than we have assumed" and that there would be problems in building consensus behind the reforms.
He also said any sharp rise in oil prices could unbalance the reform drive given Pakistan's heavy dependence on imported energy.
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