Pakistan and IMF talks still at odds

Pakistan and the International Monetary Fund (IMF) are still talking about raising taxes and electricity tariff at the last leg of technical-level discussions to put US$6 billion Extended Fund Facility (EFF) back on track.

The virtual talks between the two sides on Friday were extended at the last moment for 8-10 hours as they struggled to narrow down their hard positions to a level that Finance Minister Shaukat Tarin could strike a deal during policy-level talks with the IMF management and mission chief next week.

The IMF staff had termed Pakistan’s revenue growth ‘unsustainable’ as it could reverse as soon as policies to control imports are eased. Also, the power sector circular debt management plan was found to be ‘un-bankable’ without sufficient tariff increases. The IMF staff wanted major steps on both fronts.

These are the two critical issues where ‘give and take’ has to take place keeping in mind the economic conditions in the wake of uncertain Covid-19 situation and international commodity prices.

Tarin will hold another round of policy-level talks with Fund management next week; Finance Ministry challenges WB estimates of Pakistan’s growth rate.

The IMF programme has been in recess since March this year owing to divergent views of the two sides.

Meanwhile, the Finance Ministry has challenged the World Bank estimates of Pakistan’s growth rate at 3.5% during current fiscal year and last year.

The Bank in a report on Thursday said Pakistan’s GDP growth was expected to ease to 3.4% in the current fiscal year, as both expansionary and monetary policy measures unwind.

“The World Bank estimates are based on unrealistic assessment,” said the Finance Ministry, adding that the provisional estimate of GDP growth for FY21 was 3.94% based on 2.8% growth in agriculture, 3.6% in industry and 4.4% in services. However, LSM (large-scale manufacturing) growth was provisionally taken as 9.3% for estimating GDP growth at 3.94%.

LSM data is available with a two-month lag and the recent data released by the Pakistan Bureau of Statics (PBS) recorded LSM growth at 15.2% for FY21.

Furthermore, recent data on crops mentioned by the Federal Committee on Agriculture (FCA) suggests that production of important crops is higher than taken in National Accounts, 2021.

Wheat production is recorded at 27.5 million tons as compared to 27.3m tons, while that of maize is 8.9 million tons against 8.5 million tons as per the PBS data for estimating GDP growth at 3.9%.

After incorporating the latest available information, GDP estimated growth in FY21 will improve further above 3.94% as compared to 3.5% estimated by the World Bank.

The Finance Ministry said the World Bank projection of 3.4% GDP growth for FY22 was again underestimated. Thus, it is expected that GDP growth for FY22 will remain close to 5%. On the basis of fast recovery expected globally, especially Pakistan’s main trading partners, the Ministry expected that it will translate into domestic economy as well.

To further boost the industrial sector Ministry said, the government was taking all possible measures like special package for construction sector, relief measures in the form of tax exemptions to automobile, special economic zones, special technology zones, special facilitation for SMEs in the form of risk sharing in collateral free lending, sales tax concessions to cottage industry, concessional rate of refinance schemes, special electricity tariff for industrial use, making CPEC the platform where industries will be relocated, reduction in tax on textile products and tax relief to oil refineries so that they could turn to Euro-5 fuel. These measures will help in significant growth in industry.

Overall the commodity producing sector will perform better and its spillover impact will be realized on the services sector.

As regarding monetary and fiscal tightening, the Finance Ministry said that on the one hand the government was tightening monetary and fiscal policies to contain the demand pressures and, on the other, it was encouraging growth supporting policies.

With regard to pressure on external accounts, it is pertinent to mention that the economy is in recovery phase. The growing economy and exports require import of capital goods which leads to increase in imports. Due to government policies, the ministry said, exports of goods and services would maintain its trend on average US$3 billion per month and remittances US$2.5 billion per month, taking into account other secondary and primary income flows, trade deficit and current account would remain in sustainable range.

Moreover, the State Bank is proactively taking measures to curb non-essential and luxury imports and other foreign exchange regulatory measures for the sustainability of external sector. Regarding inflation, the ministry said the present government had taken various policy initiatives, administrative actions, and relief packages to control the inflationary pressure. It said that based on government proactive policies to reduce the inflationary pressure together with government’s growth-oriented policies, Pakistan will achieve the growth target with price stability.

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