WASHINGTON: The International Monetary Fund (IMF) has rejected the suggestion that it is dictating Pakistan’s economic reforms programme.

In a report released on Thursday along with the $553 million second tranche of a $6.7 billion loan package, the IMF notes that “there seem to be many different and contradictory views about the government’s reform agenda” supported by the Fund.

The report, authored by IMF’s country chief for Pakistan Jaffrey Franks, points out that the PML-N government mostly produced the policies supported in the programme, which respond to key challenges facing the country today.

It refers to the economic section of the PML-N party manifesto, which shows that most of the policies agreed with the IMF were actually those proposed by Prime Minister Nawaz Sharif and his team before the elections.

These include fiscal consolidation, tax reform, measures to tackle the energy crisis, restructuring and privatisation of public sector enterprises, trade policy reforms and steps to boost the investment climate.

Responding to the allegation that the programme does not address some important problems the country faces, the IMF says that while the programme can’t do everything, it tackles Pakistan’s biggest economic issues as quickly as possible.

According to the report, the most important issues agreed upon between the PML-N government and the IMF were: (1) the very large fiscal deficit, which could no longer be financed; (2) the critically low level of international reserves; and (3) the need for structural reforms — particularly in the energy sector — to get the economy out of the low-growth trap it has been mired in for years.

The report claims that the programme aggressively tackles all three.

Consequently, the deficit will come down from 8 per cent of GDP to around 3½pc over 3 years, international reserves will be rebuilt to sustainable levels, and structural bottlenecks will be significantly eased.

“Once the government addresses these core issues they can tackle other important challenges, but without stabilisation first, the economy will be too unstable to support the other efforts,” Mr Franks says.

The report also tackles the criticism that the programme may address the right issues, but in the wrong order.

It points out that with the economy in serious trouble; Pakistan doesn’t have the luxury of postponing key stabilisation measures.

It notes that some critics have argued the programme errs in focusing first on economic stabilisation and then on growth. Others wanted it to focus on improved tax collection before introducing increase in tax rates. Likewise, some feel that energy supply should have been increased first, with tariff hike later.

Referring to these in turn, the report asks: “If Pakistan wanted to postpone its stabilisation efforts to focus on growth stimulus, how would the government pay for the postponement? And how would it finance the stimulus?”

It points out that unlike the United States, which can sustain very large deficits because the world is willing to buy US government bonds, Pakistan doesn’t have this luxury. “Even if Pakistan could finance it, how effective will temporary stimulus be if investors know the government has not yet addressed underlying imbalances?” it asks.

About improving tax collection and energy supply improvements, the IMF argues that these reforms take years to bear fruit. Tax administration reforms will take 2-3 years to generate significant improvements in revenues. Energy supply enhancements can take even longer.

“So while it was essential to start those at the beginning of the programme, the government made the wise decision to include quick wins early on to address the vulnerabilities while the reforms with longer gestation periods are ramping up,” says the report.

Tackling the criticism that its policies will hurt the poor, the IMF argues that the programme will broaden the tax base and cut subsidies for the rich, while maintaining low energy prices for the lowest consumers and increasing public spending on the poorest.

The report claims that in this programme, deficit reduction will come not from cutting education and health programmes, but mostly from raising revenues. This involves bringing people into the tax net by eliminating loopholes and special privileges, and by improving tax administration and enforcement.

“In Pakistan, a country of 180 million people, only 1.2 million individuals and firms file income tax returns, of which about half are corporate filers. That must change so that more of the burden falls on those who can most afford to pay,” says the report.

The IMF argues that energy subsidies mostly benefit a small proportion of the population. The wealthiest are those who consume the most energy, so an across-the-board subsidy helps them most. The rest of the population has to endure 8-10 hours a day of loadshedding during the summer months without being able to afford the private generators.

“Under the programme, the lowest consumption levels will continue to be subsidised, while prices will go up to fully cover costs for the wealthiest. Energy supply will be better and loadshedding will fall,” the report claims.

It notes that the IMF-backed programme also includes higher social spending. The 2013-14 budget includes a significant rise in education spending. The programme also entails a large increase in targeted transfers to the poorest, through the expansion of the Benazir Income Support Programme.

“Prospects for success are enhanced by a democratically elected government firmly committed to doing what it needs to do to fix these long-standing problems and achieve its objective of making life better for 180 million Pakistanis,” the report concludes.