IMF asks Pakistan to take steps to achieve fiscal consolidation

ISLAMABAD: The IMF has asked Pakistan to take ‘decisive steps’ to achieve fiscal consolidation and debt sustainability, putting the large volume of circular debt in a downward path, adopting a market-based flexible exchange regime and strengthening the independence of the central bank in line with best international practices.

“There is an immediate need to stabilise the economy and fiscal consolidation based on enhancing revenue collections is essential. This is a strategy that would help addressing Pakistan’s current large primary deficit, which would ultimately help ensure debt sustainability over the medium term. The revenue efforts should focus on expanding the tax base, through tax policies, administrative actions and enforcement,” the IMF’s Resident Representative in Pakistan Teresa Daban Sanchez said in an informal talk with The News here Tuesday.

The primary budget balance is the government fiscal balance excluding interest payments. The IMF is suggesting for increasing tax revenue for meeting requirements of development and the provision of key public and social services of the economy.

The IMF’s resident representative talked very carefully on different issues related to Pakistan’s economy. She emphasised that both sides, the Pakistani authorities and the IMF staff, have identified all the relevant issues and set the objectives and goals the country required to achieve over the medium term. She said work is still going on finding an understanding on the pace of the adjustment policies and the combination of correction of policies.

Sanchez mentioned that one of Pakistan’s most important challenges is the low-level of private sector investment. At around 10-11 percent of GDP, it stands quite below, almost half, of the level achieved by Pakistan’s peer countries. Creating conditions for private sector investment is critical to ensuring growth at sustainable levels. This should be accompanied by social policies to ensure that the growth is also inclusive.

“Because Pakistan is a decentralised country, any fiscal consolidation plan needs to bring provinces on board, to ensure all levels of government are at one page. This may imply greater coordination, something that could be achieved, without compromising the autonomy of the provinces,” Sanchez suggested.

Correcting the issue of the circular debt may require a multidimensional approach to tackle all the driving forces behind it. This would require a combination of actions aimed at transforming the power sector, making it more efficient and better managed, while ensuring that the tariffs determined by the regulator are effectively implemented, in order to avoid circular debt would pile up. “This would require bringing tariffs to the cost-recovery level while at the same time making sure that targeted subsidies are properly budgeted and paid on time,” Sanchez explained.

Sanchez explained that dialogue between the Pakistani authorities and Fund staff continue, with a view to reach an understanding on the set of policies and reforms that could be supported by a staff-level agreement. “A decision about an IMF visiting mission has not been taken yet, but as soon it is decided we will start working on dispatching one,” she added.