IMF Conditionality Package 2013

8/12/2019 IMF Conditionality Package 2013

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INTRODUCTION TO IMF

CONDITIONALITY PACKAGE

Condition Imposed by IMF Ending Subsidy on Gas and Electricity

Increase in Tariff of electricity by 30 50%

Floor on Net International Reserves

Ceiling on budget deficit financing from the externalsources, and it is also conditional upon the governmentPSDP spending on quarterly basis

Increase the tax base and tax revenue

Freezing of non-development expenditures

Reduction in government internal debts


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IMPACT OF IMF PACKAGE 2013 - GDP

Matter is not the IMF funding but the policy

imposition

Impact can be positive and negative as well as

direct and indirect

IMF conditions include changes in

Fiscal Policy

Monetary Policy

Exchange rate policy


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Question!

Whether implementation of IMF Package will helpboost the economy or causes the real GDP to fallfrom the expected growth level?

Recent Economic performance and situation Average GDP is 3% over past five years

Problems in electricity supply

Difficult security situation

Presence of loss making public sector enterprises

Poor business climate

Distorted trade regime


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As IMF document stated that growth rate without reforms will be3%, while the government in the budget reported that growth ratewould be around 3.4%.

After the abovementioned reforms, IMF documents showed thatgrowth rate would further drops to 2.5%, which is estimated to lead

the unemployment of 1.2 million people according to industryexperts.

IMF predicted a growth of 5% in 2015-16 after the completion ofthe three year program.

But the higher energy prices resulting from tariff increment, weakersecurity conditions, lack of investor confidence, depleted foreignreserves, higher debt burden, widening current account deficit,depreciating Pakistani currency, higher interest rates because ofhigher inflation, declining investment, and non-serious behavior ofgovernment regarding tax base enhancement is more likely toremain GDP growth subdued for the foreseeable period of time.


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IMPACT OF IMF PACKAGE 2013 - INFLATION

IMF program stated condition to increase tariff by 30 50%

The weight of electricity in CPI is around 4.4 hence we canexpect the inflation directly increasing by tariff hike is around2%

Similarly the reduction in subsidy on Electricity and Gas willalso cause inflation to increase

Pakistans total foreign trade is around 33% of GDP, andincrease in exchange rate will also put forward pressure oninflation

The expectation of IMF regarding exchange rate around Rs.110by 2015-16 seems a dream as the depleting foreign reserves andhigher inflation are likely to depreciate currency exponentially


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IMPACT OF IMF PACKAGE 2013 TAX

SYSTEM

The program aims, first and foremost, at macroeconomicstabilizationthat is, bringing the budget deficit down andreversing the balance of payments problems.

To ensure medium-term fiscal sustainability and create fiscal space forsocial and investment spending, it is important to raise the tax-to-

GDP ratio, including by broadening the tax base through a reductionin exemptions and concessions and extending taxation to areascurrently not fully covered by the tax net. An overhaul of taxadministration is also required, and provinces should contributefully to the adjustment effort.

The initial consolidation effort relied mainly on the revenueside given the chronically low tax revenue-to-GDP ratio.

The government is taking a series of measures aimed atstrengthening tax revenues by over 1 percent of GDP on anannualized basis.


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IMPACT OF IMF PACKAGE 2013 TAX

SYSTEM An initiative to incorporate three hundred thousand new taxpayers

into the income tax net was launched in July.

The 2013 Finance Bill granted the FBR access to bank information

enhancing the scope and quality of information in its databases.

The income tax initiative will be complemented with initiatives toenhance revenue administration for sales, excises and customs, to be

developed and launched by end-December 2013 (structural

benchmark).

Beyond the current fiscal year, further revenue and expendituremeasures will be implemented to achieve a sustainable deficit of

around 3 percent of GDP by 2016/17.


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IMPACT OF IMF PACKAGE 2013

INVESTMENT

Investment is majorly dependent upon interest rate and investorconfidence

In Pakistan there has been a lack of investor confidence mainly due topoor law and order conditions and inconsistent government policies

IMF program 2013 is less likely to enhance investor confidence as

higher inflation will curb consumption but on the other hand higherexchange rate may encourage exports however this relationship has notbeen significant in past years

IMF suggested Pakistan to tighten monetary policy to curb inflation, butit will increase cost of borrowing and consequently will discourageinvestment

Hence overall, there is no significant incentive to promote investment inIMF program 2013


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IMPACT OF IMF PACKAGE 2013

PRIVATIZATION

PrivatizationAccording to IMF conditionality for loan sanction dollar 6.68 billion,Pakistan assured to privatize 65 public sector institutions (Ministry ofFinance).

What is privatization?

Privatization is a process of transfer of ownership of property orbusiness from a government to private entity.

Why government need to Privatize PSEs?

A statement quoted by minister of state privatization Khurram DastagirKhan that the total annual losses and drain of public finances had

touched Rs 500 billion. This is now the central point of economic policyand reforms.

Government claims that new phase of privatization shall cover fiscaldeficit. It will increase pure economic growth, development andemployment.


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IMPACT OF IMF PACKAGE 2013 BUDGET

DEFICIT

The IMF program 2013 clearly stress upon the decline inbudget deficit

We can decrease budget deficit by lowering expenditures or byincreasing revenues

IMF has stressed Pakistan to increase its tax base to increasetax revenue and decreasing budget deficit

Currently, the budget deficit is around 8.3% and the tax to GDPratio is miserably just 8.5%

The most crucial step of Pakistan can be the broadening of tax

base, add agriculture income and tax evaders in tax net Until and unless Pakistan does not move to tax the high earners,

agriculturists and tax evaders there will be no solution to thiscritical issue


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IMPACT OF IMF PACKAGE 2013 MONETARY

POLICY

As we have discussed earlier that due to the implementation of IMFprogram 2013 there are more chances of higher inflation

IMF has also accepted that there may be higher inflation and Pakistanshould use its monetary policy to deal with it

Hence we can expect the tight monetary policy in years to come

It will curb investment and there will be a downward pressure on GDPas well

Pakistan should be careful this time as it is extremely necessary toidentify the cause of the problem as well, with the problem itself

The two policies, Fiscal and Monetary are clearly divergent considering

the objectives of IMF We can not achieve higher GDP growth without investment, which has a

close relationship with monetary policy


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IMPACT OF IMF PACKAGE 2013 RESERVES

Pakistan has stepped forward to take loan from IMF with strict conditionsbecause of its consistently depleting reserves

Pakistansdepleting reserves are majorly because of current account deficitand external loans repayments

The higher growth rate of imports than that of the exports has led to highercurrent account deficit

After the loan of $6.6 billion from IMF and overall $15 billion loan fromdifferent international organization including IMF and other countries innext three years are likely to improve reserves in short term but we expectthat the medium term condition will be even worse

Higher growth of imports than exports is likely to increase the currentaccount deficit by $1 - $1.5 billion from previous year, despite theexponential increase in remittances in recent years

Hence we expect that in 2015-16 Pakistan could not achieve the level ofreserves to 3.5 months import bill


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MEDIUM TERM OBJECTIVES OF THE IMF

PACKAGE 2013

Raising growth gradually to near 5 percent by 2015/16 asmacroeconomic stability is entrenched and structuralreforms are pursued.

Bringing inflation down to 6-7 percent range by 2015/16,from the current level of 8.3 percent.

Increasing central bank reserves to over 3 months ofimports by 2015/16.

Reducing the fiscal deficit to (a)3 percent of GDP by 2015/16 from an estimated 8.0 percent

in 2012/13, with

(b) provincial governments contributing their fair share of thefiscal consolidation process.


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MEDIUM TERM OBJECTIVES OF THE IMF

PACKAGE 2013 Liberalizing the trade regime

Reforming public sector enterprises through

restructuring and/or privatization. Improving the business climate.

Strengthening the tax system.

Protecting the most vulnerable from the directand indirect impacts of reform measures.


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WHERE WILL WE STAND AFTER

IMF PACKAGE IN 2015-16?

Growth rate of exports from 2006 is around 7%

Growth rate of imports from 2006 is around 11.5%

Growth rate of remittances from 2006 is around 16%

Keeping all the above rates the current account deficit is likely toincrease by $1.5 billion from previous year

Exchange rate from 1988 to 2013 has increased , from Rs.18 per

dollar to Rs.108 per dollar, which shows an appreciation of 500%

over the period of 25 years or annual growth of 7.43%

In the foreign exchange market of countries like Pakistan, there is a

close relation between Foreign exchange reserves and Inflation rate

with exchange rates.


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WHERE WILL WE STAND AFTER IMF

PACKAGE IN 2015-16?

Our Projections 2012-13 2013-14 2014-15 2015-16

GDP Growth rate 3% 3% 3% 3%

GDP trillion Rs. 24.46 25.19 25.95 26.73

Loan Disbursement bn. $ 5 5 5

External Debt billion $ 66 69 72 75

Domestic Debt tn. Rs. 9.5 9.1 8.7 8.1

Exchange rate 110 118 127 132

External Debt trillion Rs. 7.26 8.15 9.14 9.93

Total Debt trillion Rs. 16.76 17.25 17.84 18.23

Current Account billion $ 3 3 3 3

External loan repayment

billion $

3.035 3.080 3.125

Reserves billion $ 10.000 8.965 7.885 6.760

Debt to GDP Ratio 68.52% 68.48% 68.75% 68.21%

Documents

IMF Conditionality Package 2013