ISLAMABAD - Pakistan and International Monetary Fund (IMF) on Thursday reached an agreement for a 3-year loan programme of at least $5.3 billion under an Extended Fund Facility (EFF) and the programme is said to be based on Islamabad’s “home grown agenda”.
According to the terms of the agreement, Pakistan would eliminate tax exemptions to broaden the tax base, increase power tariff by withdrawing subsidy in three years, restructure and privatise public sector entities now running in loss. Pakistan and IMF held talks from June 19 to July 4 to conduct the annual article IV consultation discussions and to hold policy discussions.
“There was no option but request the loan to save Pakistan from defaulting. We have not carried the begging bowl in our hands nor are we getting a grant, Pakistan is a member of IMF,” said Finance Minister Ishaq Dar, who was flanked by IMF Mission chief Jeffery Franks at a press briefing.
Dar said, “We are taking new loan to repay those taken by the previous government”. The volume of loan would enhance to $7.3 billion from presently agreed amount of $5.3 billion if IMF’s Board of Executive Directors accepted Pakistan’s request in September to increase the present level of access of 348 percent of Quota to 500 percent, he added.
Speaking on the occasion, Jeffery Franks said, “This is a Pakistan designed programme and government will have to take difficult decisions.” The floating interest rate would be set at three percent and that the loan would be payable over a longer period than conventional stand-by arrangements, he added.
He said this agreement of $5.3 billion would be reviewed by IMF management and finalised before going to the IMF’s Executive Board, which would consider the proposed arrangements in early September 2013, subject to the timely completion of prior action to be taken by those in authority.
Franks said the aim of the programme was to bring down the fiscal deficit to six percent – which neared nine percent last year – to a more sustainable level and reform the energy sector to help resolve severe power cuts that have sapped growth potential. Budget 2013-14 recently approved by parliament was an important step in the right direction, he added.
The IMF official said Pakistan and IMF agreed on the need for a sustained improvement in tax collections as well as significant widening of the tax base and a more equitably shared tax burden, including a phase-out of all existing statutory regulatory orders (SROs) and other measures which grants special rates and tax exemptions. On the expenditure side, untargeted subsidies that disproportionately benefit the well-off would be phased-out, while fully protecting the most vulnerable members of the society through targeted assistance.
Franks said the programme also includes a comprehensive strategy for tackling the country’s long standing energy problems through measures to address the ‘circular debt’ accumulated in the sector, tariff rationalisation, and promotion of investment in energy generation and modernisation. Such steps would help mitigate the hardship of electricity loadshedding, improve the fiscal balance, and help boost growth. Energy reforms are complemented by significant structural reforms in the areas of trade, public sector enterprises, and the business climate to encourage higher investment, he said.
IMF chief Mission said restructuring and privatisation of public enterprises – including those in energy sector – are intended to help restore fiscal stability as well as boosting investors confidence in Pakistan’s future economic prospects and opportunities leading to higher growth and job creation. The country also has a programme to restructure and even privatise public sector enterprises, which would generate significant revenues, he said.
“A determined effort is required to improve medium-term growth and move toward sustainable fiscal and external positions. This requires a strong political consensus, in the central government as well in the provincial governments, on a medium term programme of fiscal consolidation anchored on an efficient and equitable tax system.”
Finance Minister Ishaq Dar said, “The programme aims at stabilising Pakistan’s economy and creating an enabling environment for revival of growth. Fiscal consolidation, containing inflation, resolution of energy crisis - including settlement of circular debt -, improving business climate, promoting foreign investment, restructuring of public sector corporations and revival of privatisation programme.”
Dar said, “We have negotiated a programme, which is home grown and entirely of our own making as was reflected in the Budget for FY 2013-14.” He said that government of PML-N inherited a broken economy. Much of this description also applies to the fact that Pakistan has been saddled with huge payment liabilities of the previous government to retire previous loans from the IMF without having adequate foreign exchange reserves. Resources from the previous loan were not efficiently utilised with result that sufficient reserves are not available to service them.
“We are paying others’ borrowings. However, it is Pakistan’s obligations and hence we have accepted the challenge to not only go into a fresh IMF programme to retire past liabilities but also meet the imperatives of an economy that needs structural reforms and to realise its true growth potential,” he further said. He added that country’s public debt has surged to Rs 14,000 billion. To a question, Dar said federal government could not impose taxes on agricultural and real estate as, according to the constitution of country, provinces could impose these two taxes.