The International Monitory Fund (IMF) will provide $840million to Pakistan later this month, the second tranche of its $7.6billion financial package, after reviewing the country’s macro economic indicators which have started showing signs of recovery after teetering on the edge of collapse six month ago.
In October later year, the IMF was skeptical of what the government refers to as ‘homegrown remedy’ tailored by Pakistan to its own financial crisis. But, thanks to a global downturn in food and oil prices that the country has been able to cross its foreign currency reserves target of $8billion and has now reached an encouraging $10billion figure. The country has ensured that its fiscal deficit will be brought down to 4.3 per cent when the current financial year ends on June 30 from 7.4 per cent last year.
Weekly inflation hit 23 per cent last month, and overall inflation remains 20 per cent, and is projected to reach 10 per cent on June-to-June basis by the end of this financial year.
Advisor to Prime Minister on Finance, Shaukat Tarin, called the economic bounce-back ‘help from God, Who has been very gracious’. He briefed journalists here on Monday on the macroeconomic indicators for the current and next financial years following Pakistan-IMF negotiation that were held in Dubai last week.
But, he simultaneously warned his ‘politician brothers’ to ensure ‘political stability for God’s sake’ if they wanted to enable the government achieve targets of its 24 months economic plan that also included achieving a 4 per cent Gross Domestic Product (GDP) growth next year (2009-10) compared to this year’s gloomy 2.5 per cent and later ensuring that the economy would grow between 6 to 8 per cent in the coming years.
In response to a question, Mr Tarin said the IMF has not shown concerns over the ‘political turmoil’ in Pakistan during the Dubai talks, but it did not mean that law and order and political instability would not affect government’s efforts to achieve its economic targets.
‘Why should we wait or look to IMF or any other body to warn us about the economic fallout of a political turmoil. We, ourselves know how much vital security and political stability are for economic development,’ Mr Tarin observed.
The current account deficit by the close of this fiscal year is estimated to remain 6 per cent, but will further be brought down to 4 per cent in 2009-10. Budget deficit which was expected at Rs261billion has further been brought to Rs249billion that translates to 4.3 per cent of GDP. By the end of the next financial year, the government estimates to bring down budget deficit to 3.3 per cent of GDP.
And, the IFM, Mr Tarin said, was satisfied with this and also some tax reforms and the government’s nine-point economic agenda.
The advisor, however, admitted the government this year had missed the Rs1360billion revenue collection target by Rs60billion. The tax to GDP target of 10.2 per cent had therefore also been missed.
‘Even if we stretch the tax base further, tax to GDP ratio will still stay under 10 per cent, which means we have missed the 10.2 per cent target,’ Mr Tarin said, adding that ‘everybody cannot be taxed as there should be no undue taxes’.
Inflation, which he said Pakistan would able to bring down to single digit next year was the ‘worst enemy’ of the people and economic growth and hence needed to be arrested besides ensuring good fiscal management.
‘In order to achieve this, We should continue to do what we have been doing,’ Mr Tarin said.
On the other hand, the government has agreed with the IMF to completely eliminate the current Rs65billion annual subsidy on electricity by June this year. This means that the National Electric Power Regulatory Authority (Nepra) will have to give a green signal for another increase in electricity tariffs from April/May that is estimated to be will over 20 per cent, a fact towards which Mr Tarin refrained to point directly or explain in clear words.
But, in response to a question, the advisor said following the September-2008 countrywide protests over 31 per cent increase in power tariff by Nepra, the government would also include the ‘efficiency factor’ of the distribution companies and decrease in price of furnace oil while approving any final increase in power charges in the coming months.
The stability in the macroeconomic indicators, Mr Tarin said has enabled the government to now launch political lobbying for making the IFM board agree to its demand of increasing Pakistan’s standby facility to ‘eight times of its quota’. If the IMF does so, Pakistan would be able to get additional $4.5billion from the fund.
The $7.6billion financial package approved by the IMF on November 24, last year, was five times of Pakistan’s quota. The country has already received the first tranche of $3.1billion.
Mr Tarin said the government intended to bring down discount rate on bank loans (interest rate) to help new businesses and industrial growth. He said the decision of the State Bank to take up interest rate by 2 per cent to 13 per cent had been taken as it was one of IMF’s conditions for the release of funds. He said the IMF had even proposed 5 per cent increase in discount rate, which was not fully accepted by the government. He said the government was not in favour of increase in discount rate as it had predicted decline in food and oil prices, a factor that had jacked up the trade deficit. And, now it seemed that the government was right at that time, and hence it would decide to bring down discount rate.
The advisor said the government had to further decrease taking undue credit from the State Bank. This year, Pakistan’s external and internal loan was around 56 per cent of its GDP that has increased from 55 per cent last year, but would be brought down next year. Pakistan’s GDP is Rs13.384billion.
The advisor said the government was trying to bring down the per kg price of sugar from present Rs48 to Rs38 by releasing 100,000 tons of sugar to the Utility Stores Corporation (USC) outlets every month and also taking some other measures. He said millers had not made timely payments to sugar growers last year owing to which this year’s sugarcane production was less than the local demands and hence the government had allowed the import of the commodity.