IMF Says Pakistan Bailout Sets Ambitious Fiscal Targets

IMF officials have said that the $6 billion loan package for Pakistan, approved by the International Monetary Fund last week, will require “very ambitious” fiscal measures and sustained commitment for the bailout to succeed.

This is Pakistan’s 13th bailout since the late 1980s, and has seen a sharp drop in the value of the rupee currency after the central bank agreed to a “flexible, market-determined exchange rate”.

Ernesto Ramirez Rigo, the Fund’s mission chief for Pakistan said the program targets were tough but Prime Minister Imran Khan’s government, which came to power last year vowing not to turn to the IMF, was committed.

“We certainly think that debt sustainability under the program will be assured,” he told a conference call with reporters, adding that it would require “very ambitious” fiscal consolidation, mainly through improved revenue collection.

The IMF foresees structural economic reforms and a widening of the tax base to boost tax revenues that are currently estimated to account for less than 13% of gross domestic product (GDP) by 4-5 percentage points.

With slowing growth, a budget deficit which has climbed to more than 7% of GDP and currency reserves of less than $8 billion, or enough to cover 1.7 months of imports, Pakistan has teetered on the edge of a debt and balance of payments crisis.

The IMF loan and the associated package of reforms that goes with it will unlock another $38 billion in loans from other international partners but the commitment by Pakistani authorities in pushing through reform was essential, Ramirez Rigo said.

Consistency and sustained implementation is key.

The 2020 budget, passed last month, approved tax measures worth some 1.7% of GDP to help cut the deficit and Pakistan has promised a multiyear effort to overhaul its tax and budget system to put its public finances on a firmer footing.

Provinces to Deliver Surpluses

The provinces will take steps to increase tax-collection efforts in sales tax on services, property tax, and agricultural income tax, and harmonise their tax system to eliminate fragmentation and reducing the scope of the divisible pool in the context of the ongoing NFC award and reforming the revenue sharing formula to improve inter-provincial equity for better horizontal equity, said the report.

The Staff Report prepared by a staff team of the International Monetary Fund (IMF) for the Executive Board’s consideration for July 3, 2019 meeting and uploaded on the website stated that the federal and provincial governments have formally agreed on the programme’s fiscal strategy and the required provincial surpluses (prior action).

The provinces have agreed to deliver surpluses of around 1 percent of GDP in the fiscal year 2020; gradually increasing to 2.7 percent by the end of the programme, by saving the additional revenues generated through tax policy and administration reforms.

Recent Economic Developments and Outlook

Pakistan’s economy is at a critical juncture. The legacy of misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves.

Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss-making SOEs, amid a large informal economy.

Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.