Transcript of a Conference Call on the Executive Board Conclusion of the Third Review Under Pakistan Stand-By ArrangementWith Adnan Mazarei, Assistant Director, Midlle East and Central Asia Department, IMF
Wednesday, December 23, 2009
MR. MAZAREI: Good afternoon, ladies and gentlemen. I am Adnan Mazarei, Mission Chief for Pakistan at the International Monetary Fund. Today, the IMF Executive Board completed the third review on the standby arrangement, allowing Pakistan to obtain about $1.2 billion more from the IMF. The welcome news on the macro front is that stabilization is progressing. The budget and external current account deficits have declined. Reserves have increased to over three months of imports, and, importantly, inflation has declined from 25 to 10 percent, reducing the tax on the poor.
The government has also taken important steps towards structural reform, putting in place the framework for moving toward a value-added tax, improving tax administration and also strengthening the central bank’s ability to conduct monetary policy more independently, and also with better abilities and powers to supervise the banking sector.
Nevertheless, there are significant challenges that remain. Significantly, the budget needs to be managed better. There is a need to fully reverse the first quarter fiscal outturn and slippage, and avoid future overruns to keep inflation low, build economic confidence and ensure that resources are available for poverty reduction, assisting internally displaced persons and boosting social spending. Given the likely need for higher security spending, this will require efforts to mobilize revenue and cut non-priority spending in the months ahead.
International donors also need to disburse the pledges they made to Pakistan in the Tokyo meeting in April of this year. They need to do so promptly because these disbursements are meant to finance much needed investments in infrastructure, health, and education.
As inflation continues to decline, monetary policy could become more flexible and allow interest rates to come down further. The uncertainties about the financing needs of the government are limiting the central bank’s ability to lower interest rates.
On structural reforms, despite headwinds from unsettled political and security events, as I mentioned, the economic team has persisted in its reform efforts and furthered their agenda, especially in the areas of tax administration. There have been important steps, including the creation of an internal revenue service, and efforts to improve tax filing and refund systems, and audits of taxpayers. The introduction of a broadbased value-added tax planned for July 1, 2010, will be essential for increasing tax revenue, which is needed for reducing poverty, and investing in the people of Pakistan and the country’s physical infrastructure.
We very much welcome the legislative initiatives to strengthen for the financial sector. The new legislation submitted to parliament to amend banking company ordinance will strengthen the effectiveness of bank supervision. In addition, we also welcome the amendments of the State Bank of Pakistan Act, submitted and signed by the president recently, to enhance the State Bank’s operational autonomy. We also welcome the plans to introduce a bankruptcy law next spring.
A key plank of the Pakistan reform program has been the safety net, social safety net. There has been progress in implementing a strengthened social safety net system under the Benazir Income Support Program, but this has been slower than planned, and we hope that these efforts are accelerated in the coming months.
I thank you very much, and I would be very happy to take your questions.
QUESTIONER: What was the budget deficit target for Pakistan as part of the loan program?
MR. MAZAREI: The budget deficit target for the fiscal year ending in June 2010 is 4.9 percent of GDP, including spending on IDPs financed by foreign grants.
QUESTIONER: Is that the target that was missed by the 0.3 percentage?
MR. MAZAREI: We missed a quarterly target.
QUESTIONER: Okay, and what was that quarterly target?
MR. MAZAREI: The overall target for the first quarter, which means end of September, was 0.3 percent of GDP. The shortfall was 0.3. And the fiscal deficit should have been roughly 1.2 percent of GDP, and it was 1.5.
QUESTIONER: So many things are going badly in Pakistan but in this area things seem to be improving. What is your explanation for why this seems to be an exception to what has been a string of tough news?
MR. MAZAREI: Well, to be honest with you, Pakistan has got into a very difficult position last year, and the authorities have realized that they need to take the reins of the economy in hand. Hopefully, our advice and our financial support, and other international financial institutions, have also helped. But I must commend the economic team headed by Finance Minister Tarin and the governor of the central bank, Salim Raza, who have taken very tough decisions and, despite an inclement political and security situation, have pushed many reforms ahead.
Not all, not everything has been perfect. For instance, we just discussed this fiscal slippage. But even to keep things on track as they have, implement the measures that they have, for instance, putting in better tax administration, taking steps to eventually introduce value-added tax by end of June of next year, and also improve the social safety net has taken commitment and dedication.
There have been shortfalls, no doubt. But it tells you that even as times are very, very tough on other fronts, commitment and a framework for moving forward, of course, together with financial assistance from the Fund and from other donors like the World Bank and the Asian Development Bank have been helpful.
QUESTIONER: And just a follow-up. You essentially hinted at higher spending on security matters, going forward, and a need for more revenue and less expenditures, where were you -- what do you think will bite? Where will that bite most?
MR. MAZAREI: Look, inevitably, it will imply some cuts in spending. The authorities have just announced what they have called an austerity plan to reduce the size of the administration, reduce the number of cabinet positions, reduce official traveling, including for the president and the prime minister, and take steps to reform the unprofitable public enterprises. But also, to be very frank, there has to be cuts in spending, including on some development spending that were supposed to be financed by donor assistance, but for which assistance has not yet come in. They have also had to take revenue measures to cover some of the security spending, the higher security spending.
QUESTIONER: Thank you for the opportunity. Could you kindly say that the international economic powers are extending enough support to Pakistan, which is facing some tough security challenges, which are impacting its economic performance?
MR. MAZAREI: Yes, indeed. I mentioned in my introductory remarks, donors have promised over $5 billion, especially in the Tokyo meeting for Pakistan over the next 3 years. Unfortunately, much of this has not yet come in. Some of this has been because of security issues, which have hindered project selection and implementation. And we are hoping that the donors are able to fulfill their commitments in the coming months and years, to Pakistan. Pakistan efforts need a much greater financial support from the international community.