ISLAMABAD: The government reached an agreement with the International Monetary Fund on Monday for the disbursement of a tranche of $506 million next month as part of the $6.8 billion package under the Extended Fund Facility.

After the signing of the agreement, Finance Minister Ishaq Dar announced at a press conference the withdrawal of tax exemptions totalling over Rs100 billion, adjustments in energy tariffs and a cut in subsidies during the next financial year.

At the joint news conference, with IMF mission chief to Pakistan Harald Finger, the finance minister set a new target to take the country’s foreign exchange reserves to a record $18.5bn by the end of Ramazan. He asserted that multilaterals like the IMF “are Pakistan’s development partners. They are not our masters”.

Mr Finger confirmed “staff-level agreement” with Pakistani authorities and set out a four-point policy agenda for the government to move into growth mode after achieving macro-economic stability in its first two years. He, however, agreed that there was no ‘silver bullet’ to fix the economy and reforms required staying course.

“Key priorities for the second half of the (IMF) programme include improving the energy sector, widening the tax net to create space for infrastructure investment and social assistance, improving business climate and further strengthening external reserve buffers,” said Mr Finger, adding that strong implementation of reforms in these areas, as envisaged in the programme, would transform Pakistan into a dynamic market economy. He forecast Pakistan’s economy to grow by 4.1 per cent this year and 4.5pc next year.

The finance minister said the staff level agreement on the seventh review of the $6.6bn extended fund facility would be taken to the IMF management and then for approval by its executive board. “Hopefully, $360bn Statutory Drawing Rights or around $506bn should be released to Pakistan within June,” he said.

He said Pakistan achieved all performance criteria for the period up to March 2015 and did not seek any waivers in two latest reviews, but some additional issues like expenditure required for the Zarb-i-Azb operation needed to be settled with the IMF. Rs44bn on the military operation and resettlement of temporary displaced persons during the current fiscal year have been adjusted within the budget.

Mr Dar said Pakistan would achieve fiscal deficit target of 4.9pc of GDP during the current year, but the two sides agreed to have an allocation of Rs130bn or 0.3 per cent of GDP next fiscal year for the military operation.

“So next year fiscal deficit target has been set at 4.3pc of GDP, instead of previously agreed level of four per cent,” he said, adding that if the expenditure exceeded this limit, the government would contain other expenses.

“This is the most important expenditure in Pakistan’s history” to complete military operation and move into the next preventive mode to strengthen civil armed forces and settle displaced people and build roads and other infrastructure, he said.

Mr Dar said the government would continue with fiscal discipline it had exercised over the past 21 months as it achieved macro-economic stability and would now pursue reforms vigorously to ensure that Pakistan entered the rank of emerging market over the next three years.

Both Mr Dar and Mr Finger flagged major lapse in revenue collection by the Federal Board of Revenue, but attributed this to the decline in food and oil prices. The minister said the government had introduced an ordinance for withdrawing powers of the FBR to issue tax exemptions through statutory regulatory orders.

He said the powers now stood transferred to parliament, except for matters of national security, natural disasters, abnormal fluctuation in international prices, international commitments and removal of subsidies because of emergency situations.

The IMF mission chief sidestepped a question if it was prudent to keep the circular debt off the budget to show lower fiscal deficit while making it part of budget in 2013 to put the deficit at 8.8pc of GDP, but said the circular debt had again increased to Rs260bn by now in addition to Rs335bn parked in the power holding company.

He said the IMF was encouraged by an amendment bill taken to parliament for independence of the central bank to have an independent monetary policy but there were some additional issues that would be pursued as the programme progressed.

Published in Dawn, May 12th, 2015

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