Three and a half years ago, the Government of Pakistan designed a comprehensive economic strategy to avert a debt crisis and raise the standard of living of the people durably. The IMF was invited to support this strategy, including through a three-year $1.4 billion loan at concessional terms aimed at sustained economic growth and poverty reduction. Half of this loan amount has been disbursed already, including a substantial portion under the present Government, confirming continuity of the reform effort.

The ultimate success of the strategy, however, depends on substantial employment creation through increased private sector investment. How can the Government induce the private sector to invest? And how does the IMF contribute to such an enabling environment?

In our dialogue with the Government, the IMF highlights the importance of financial stability: confidence in the value of the rupee is essential, albeit not sufficient, to persuade businessmen to invest. The recent strength of the rupee owes a lot to the reduction in the external debt overhang that has occurred. But fiscal discipline will remain crucial for a further reduction in the public debt burden and sustained financial stability.

The other way in which the IMF helps foster a conducive investment climate is by supporting the Government in its efforts to strengthen economic policies and institutions in ways that remove opportunities and incentives for corruption. I will highlight four areas:

First, CBR should ensure better tax compliance without resorting to extortionary practices. IMF experts have worked with CBR toward applying best international practices in the operation of the Large Taxpayer Office in Karachi; in designing a fair yet effective audit system that is needed in an income tax regime that relies on self-assessment; and in modernizing the customs administration. We strongly support the expeditious introduction of the pilot project for the Karachi Customs scheduled for March 2004 which is vital to help clear import consignments in under 48 hours, apply verification methods that involve minimal cost and nuisance to importers, and to reduce face-to-face contact and thus opportunities for collusion between tax officials and customers to the detriment of the state finances.

Second, broad-based taxation spreads the tax burden more evenly and transparently. We endorse the Government's strategy not to introduce new tax exemptions. Exemptions tend to favor narrow interest groups and breed further lobbying by others, leading to a vicious circle of an ever smaller tax base. The IMF also supports the Government's strategy to work with the provinces toward enacting legislation to limit the enforceability in court of "benami" practices. Holding assets in the name of someone who is not the true beneficiary is often aimed at concealing ownership of assets acquired illegally, defrauding banks and other creditors, or evading taxes and government charges. The resulting wider tax net should permit a further lowering of some tax rates.

Third, a market-based and private sector-led energy sector will help reduce uncertainty and improve the quality of energy delivery. Petroleum product prices are already adjusted automatically, upward and downward, for changing international import costs; this has removed the unpredictability that comes with discretionary Government intervention. In the power sector, a rules-based system for ensuring cost recovery of imported fuel oil and a transparent regulatory framework are essential to safeguard the financial viability of the public utility companies and persuade private investors to acquire equity in these companies. WAPDA and KESC should lower operating costs by enhancing the integrity of procurement and strengthening oversight of bill collection. Pass-through of the resulting lower operating costs will improve Pakistan's international competitiveness and bring relief to those customers who pay honestly but are victimized indirectly by those who collude with metering personnel or do not pay at all. In turn, government agencies should be held accountable to pay on time for the electricity they consume.

Fourth, the IMF has contributed to enhancing the integrity and transparency of budgetary expenditures, including through the offices of the auditor-general and the accountant-general. We work with the State Bank to strengthen its surveillance over the integrity of the financial system.

Mr. Chairman,

Several of the measures proposed in the Government's anti-corruption strategy will cost money : improved pay and retirement security for civil servants; severance payments in the context of rightsizing; and training in financial management at local levels, to mention a few. These measures will enhance the capability and motivation of civil servants to provide quality service to ordinary people without extracting monetary compensation. But they will burden the budget, and come on top of other priority outlays for poverty reduction and infrastructure requirements. Given the need for continued restraint in incurring new public debt, expenditures of lesser priority would need to be curtailed. Hence the IMF's advice to the Government to curb unproductive outlays including transfers to loss-making state enterprises, and generalized subsidies that tend to benefit politically vocal groups and not necessarily the most vulnerable.

In conclusion,

Over the remaining months of the current loan arrangement, the IMF stands ready to continue to support Pakistan by helping solidify awareness of the importance of responsible fiscal management and through heightened integrity in the operations of the Government. Both are indispensable, including for sustained access to international capital markets.

The Government's excellent anti-corruption strategy contains numerous specific proposals. Faced with a daunting task and limited implementation capacity, there is a risk of discouragement taking over. Prioritizing and time-bound sequencing therefore become important. Accelerated steps now to reform the judiciary; enhance the motivation, transparency and accountability of the civil service; and enact key governance legislation through Parliament would seem urgent priorities. These steps will respond to the needs of the businessman and of all Pakistanis.