• Fund wants sharp adjustment, government seeks graduated path
• More taxes but reduced duties for exporters in money bill
• Senate panel questions depreciation

ISLAMABAD: Preparations are on for introducing the third money bill of this fiscal year, while discussions between the government and the International Monetary Fund have been ramped up. Reports following a late evening hour-long video conference between the government and the IMF suggest that differences persist between both sides over a broad spectrum of issues.

Also read: Stabilisation measures

Finance Minister Asad Umar announced his intention to bring a new money bill when he appeared before a parliamentary panel on Wednesday morning along with State Bank Governor Tariq Bajwa.

Informed sources said that during the video conference, the government and the Fund could not agree on the timing and pace of the fiscal adjustment and structural reforms. They said the IMF mission raised questions over Pakistan’s memorandum of economic and financial policies (MEFP) submitted last week and the finance minister responded.

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The questions related to the proposed fiscal adjustment, energy pricing, monetary and exchange rate policy and structural reforms contained in the government’s MEFP, an informed source told Dawn, adding that the IMF team had reservations over viability of the government’s proposals in all areas, although the degree of disagreement varied. The mission also raised questions over the way forward on the state-owned entities.

Separately, the IMF’s resident representative to Pakistan confirmed in a short message to Dawn that the plan referred to by the finance minister had been received by them.

“The Pakistani authorities have shared with us a document called ‘Pakistan: Stabilisation and Medium-Term Sustainable Growth Framework’,” she said via text message from Washington DC where she is these days.

“We are in the process of reviewing this particular document and the objective continues to be to achieve understanding on policies and reforms that could be the base of a staff-level agreement.”

The source said the IMF was demanding most of the policy actions, both fiscal and structural, to be frontloaded in the first year, while the government wanted them spread out over the three years of the programme and in some cases to run into the fourth year of the government. Further details were not available.

The two sides also discussed the external financing gap for the current year. The IMF agreed that financial requirement for the current year had largely been met but wanted more clarity on financing plan for the next year and beyond.

“It is not yet clear if the IMF package would be finalised next month,” the source said.

The finance minister was not available for comment, but his adviser and spokesman Dr Khaqan Hassan Najeeb said the two sides held “fruitful discussions”.

“They raised some queries on Pakistan’s policy document shared last week and we answered and explained things; both sides agreed to remain engaged, maybe tomorrow and beyond,” he said.

In the morning, the minister took a parliamentary panel into confidence over his plans to table a money bill early next month and then discussed its details and other fiscal and monetary adjustments with the IMF mission chief Harald Finger and his team through a video conference in the evening.

Responding to an observation from a senator, Mr Umar agreed that the pace and timing of structural reforms had political and economic costs, like public protests in some European countries, and the government wanted to move in a phased manner.

Speaking before the Senate Standing Committee on Finance headed by Senator Farooq H. Naik, the finance minister said the proposed measures would not necessarily mean increase in taxes and duties but reduction as well so that the wheel of the economy also starts moving. He said these measures had come from the Economic Advisory Council (EAC).

The minister said the non-oil imports had already registered a 20 per cent reduction but the impact was compensated by higher oil prices. He said there was a difference of opinion in the definition of “luxury items” but the total import bill of such items was about $2 billion and was also a key source of revenue.

The minister said the money bill would carry some tax proposals and reduction in duties on raw material. He hastened to add that no final decision had been taken yet but tax proposals and tariff reduction on inputs used in production of export items were under consideration.

He said there was no urgency to approach the IMF for a bailout package because the $12bn financing gap for the current fiscal year had been arranged from friendly countries. He said that $2bn from Saudi Arabia had been received and another $1bn would be available early next month. The loan had been made available at 3.18 per cent return.

The Saudi oil facility would also become operational early next month with a monthly amount of $274 million. In the first year, the annual bill would be about $1.5bn. Practically, therefore about $4.5bn cushion for balance of payments support from Saudi Arabia would become effective during the current fiscal year.

Mr Umar said talks with the United Arab Emirates on a support package were also in final stages and hopefully would conclude on a positive note and agreements with China were also at the final stage. He said the two governments had desired secrecy until finalisation of the plan.

He said Pakistan had difference with the IMF over the pace of reforms. “They want us to fast-track adjustment, but we believe it has political and economic implications. We have submitted a complete plan to the IMF and discussions are continuing as to how we want to move ahead for stabilisation,” he said.

Meanwhile, replying to questions in the Senate, the finance minister said flight of capital had been taking place and exports had gone down for two reasons: first due to erosion of exporters competitiveness owing to high input cost of electricity and gas, and second that most of the foreign investment has been in the power sector, banking and telecom and investment, not in productive industry.

He laid emphasis on the need to improve ease of doing business and tax reforms and said both these issues were being addressed on a priority basis with gas supply at $6.5 per unit and electricity at 7.5 cents per unit to industry.

Also, a mechanism to clear the pending refunds of Rs250bn of sales tax and drawback of local taxes and levies (DLTL) was being developed to ensure that they get an auto-debit through the State Bank once documentation is complete so that exporters need not visit FBR offices.

In response to some questions on the exchange rate, the finance minister repeated his earlier remarks that the recent depreciation was necessary, though did not need to be as sudden as it was. He underlined that the total depreciation was only Rs3 per dollar.

The State Bank governor also emphasised that market mechanism determined the rate, and the sudden movement seen a few weeks ago lasted only 30 minutes, with one major transaction of $200m compared to daily traded volume of $300m.

Published in Dawn, December 20th, 2018