International Monetary Fund (IMF) staff level mission has stated that Pakistan has met all economic goals and performance criteria which mean the next trench out of Extended Fund Facility (EFF) of $ 6.0 Billion will be released upon confirmation by IMF Executive Board when IMF staff will submit a detailed report. IMF mission apparently agreed government’s demands to subsidy food items and not to come up with a minibudget for change in tax rates for achieving incredibly high tax targets till June 2020 so that inflationary pressure on general public may ease out.
However, IMF has not acceded to revise the tax collection targetdownward and asked government to increase non tax revenue by $400 Billion together with a sustainable roadmap towards privatization. IMF has suggested Pakistan to increase trade agreements with other countries by not limiting itself with China. It further stated that impact of Coronavirus will not only impact Pakistan’s economy to slow it down further butthe same can swell inflation figure as well.
Pakistan however rejected such claim where it should be noted that the Chinese currency Yuan will depreciate 3 to 5 percent which can reduce Pakistan’s import bill by $300 Million. Moreover, Chinese border is already closed from November 2019 due to heavy snowfall and will resume in April 2020.
Please note that China Pakistan Free Trade Agreement phase two (CPFTA II) implementation is a tremendous achievement under present regime and it will boost exports of the country towards China specially related to Textile products. In this context it is further to note that Large Scale Manufacturing Units (LSM) showed a growth rate nearly to 10% in December 2019 as compared to same period of last year whereas overall contraction in LSM during 5 months of present fiscal year came down to 3.4% from 6%.
Pakistan has showed resistance over increasing power tariffs so that industries particularly and general public at large may not be effected in an environment where inflation is on rising trend. IMF however asked government of Pakistan to give viable alternate plan so that there may not be a cash leakage
It is a notable fact that last Pakistan’s export merchandise has posted negative growth over the past two consecutive months despite of subsidies and devaluation which needs attention and corrective measures. Government needs to focus on Import substitution industry equally so that trade account may be controlled in country’s favour.
A statement is released by IMF staff mission on 14th February 2020 which stated that “Considerable progress has been made in the last few months in advancing reforms and continuing with sound economic policies. All end December performance criteria were met, and structural benchmarks have been completed.” The mission was led by Ernesto Ramirez Rigo who remained in Pakistan for 10 days to conclude second review. The mission further stated that by implementing the program, development and social spending have been accelerated whereas macroeconomic outlook remains under control including Current Account deficit supported through real exchange rate. Mission is optimistic over controlling inflation and revealedthat “Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary”.
During the review Pakistan has reported fiscal deficit at 2.3% of GDP in first half of Fiscal Year 2020 (1HFY20)if one may compare it to 1HFY19 i.e. 2.7%. Primary balance reported at 0.7% well within the IMF target of 0.6%. However it is also a notable fact that fiscal deficit in 2QFY20 clocked to 1.6% of GDP as compared to 0.7% in previous quarter of present fiscal year. Total revenue increased by 39% Year on Year (YoY) in 1HFY20 majorly attributed to non-tax revenue. Out of such increase, Tax collection increased by 18% YoY which is less than the target.
Non-Tax revenue supported in this criterion and posted 213% increase YoY. Out of tax revenue indirect taxation increased considerably whereas Petroleum Levy during the period under discussion has increased by 68% which means that Federal Board of Revenue should be given more authority to perform independently together with other law enforcement agencies to raid tax evaders. Government is also increasing development expenditure to generate employment opportunities where growth of 28% YoY reported in 1HFY20 and 122% QoQ. Please note that Mark Up payments in 1HFY20 increased by 46% YoY.
Pakistan side has showed resistance over increasing power tariffs so that industries particularly and general public at large may not be effected in an environment where inflation is on rising trend. IMF however asked government of Pakistan to give viable alternate plan so that there may not be a cash leakage. Reportedly, Prime Minister Imran Khan declared energy problem as national issue and asked all relevant officials to join heads for the solution. IMF has been requested to relax tax targets but the mission seems unable to give such relaxation where it had reduced tax target to Rs.5.2 Trillion already at first review and now showing its concern as FBR could have collected Rs.2.1 Trillion in 1HFY20.
It is imperative to mention here that the tax target given by IMF to Pakistan is already superficial where LSM showed a negative growth rate together with declining agricultural output due to natural calamities. Now when Pakistan Bureau of Statistics showing some positive developments in LSMs and CPFTA II can reap benefits Prime Minister Imran Khan hints a cut in discount rate to support the industry. While real effective exchange rate is under control and imports are expensive, the decision is positive for industries making import substitutions. However it can impact hot money coming into Pakistan as investments in T Bills and Pakistan investment bonds. Apart from regular discussions, IMF has come up of the idea for Pakistan to reduce its trade reliance on China and try to find other relevant countries to execute Free Trade Agreements (FTA).
IMF also highlighted impact of Coronavirus on Pakistan’s economy in this regard. Pakistan instantly understood the direction of this statement and replied with logical counter arguments.It is a notable fact that trade activities with China slowdown traditionally during snowfall season starts from November and ends somewhere near to April. This is the time period when the virus spread and now is getting treated to make its impact to the minimum. Moreover textile exports of the country can be increased as orders from Virus hit Chinese area related to textiles can come towards Pakistan. Moreover Yuan depreciation due to this unfortunate event can benefit Pakistan in shape of decline in import bill from China to the tune of $300 Million.
The writer is a Corporate Finance Specialist and a Chartered Banker (UK)