Transcript of a Conference Call on Pakistan With Juan Carlos Di Tata, Senior Advisor, Middle East and Central Asia Department

November 25, 2008

With Juan Carlos Di Tata, Senior Advisor, Middle East and Central Asia Department
Washington, D.C., November 25, 2008

MS. KAMATA: I'm Yoshiko Kamata of Media Relations at the IMF. Welcome to this conference call on Pakistan. With me here is Mr. Juan Carlos Di Tata, Senior Advisor of Middle East and Central Asia Department of the IMF. Mr. Di Tata will give brief opening remarks and then we'll be happy to take your questions.

MR. DI TATA: Yesterday the IMF Executive Board approved a 23-month Stand-By Arrangement with exceptional access of about $7.6 billion dollars in support of Pakistan's program of economic stabilization.

Let me say that the purpose of the IMF assistance is to help the government and people of Pakistan deal with some difficult economic and financial challenges. You know that inflation has doubled, the value of the rupee has fallen by a third since end-March and the foreign exchange reserves of the State Bank of Pakistan are now down to worrying levels. And these problems are the result of the worsening international financial environment, but also of weaknesses in Pakistan's own economy.

The program has two main objectives. First, to restore macroeconomic stability and confidence through a tightening of macroeconomic policies, and second, to do so in a manner that ensures social stability and adequate support for the poor during the adjustment process. The financing from the IMF will help to ease the path of adjustment and will provide a strong signal of support to the international community.

$3.1 billion will be made available by the IMF immediately to strengthen the reserve position of the State Bank of Pakistan. The regular monitoring of the economy by the IMF will show how the macroeconomic objectives set by the government are being met and whether they need to be adjusted in light of changing circumstances.

It is important to point out that the program is based on the targets and measures that the authorities have themselves set for the next two years. It is also important for the donor community to assist Pakistan during this period, especially by funding the expanded social safety net and higher spending on development programs. And the IMF stands ready to participate in any donor meeting to provide the economic and financial analysis that could underpin expanded support.

I will take your questions now. Thank you.

QUESTIONER: You have given us the annual targets but they have really been in the quarterly one, and my question is when the first tranche, the $3.1 billion, will be available and for the next tranche, what are the requirements that Pakistan has to fulfill?

MR. DI TATA: The first tranche as I said will be available immediately because the program has already been approved. The second tranche will be made available after the completion of the first review under the program, which is expected to be completed probably in mid-March 2009.

As you know, Fund programs have certain conditionality, quarterly conditionality. This program also has some quarterly targets on several variables including, for instance, the budget deficit, budget borrowing from the State Bank of Pakistan, international reserves, the domestic assets of the State Bank of Pakistan. So the second disbursements will be made available, contingent on complying with these quarterly targets. And also we will review some benchmarks on some structural issues that are included in the program.

QUESTIONER: I have two short questions.

The first one, could you give us an idea of how much more financial assistance Pakistan will require over the next 12 months? And secondly, in your discussions with Pakistan was the subject of cuts in defense spending broached and what conclusions were reached?

MR. DI TATA: In terms of financial assistance, for the FY2008/09 (you know the fiscal year starts July 1), the gross external financing requirement will be on the order of $13.4 billion. This is a two-year program, so this is only for the first year of the program.

For the second year of the program, that is for FY2009/10, we are talking about a gross external financing requirement on the order of $12.2 billion. These amounts that I have mentioned are needed to cover the current account deficit for both fiscal years and the maturing short-term debt and the amortization on long and medium-term debt.

Out of that amount, about $8.8 billion in FY2008/09 will become available through medium- and long-term borrowing from multilateral institutions and some bilateral creditors, from foreign direct investment (FDI) and other sources. And the remaining $4.7 billion will become available through use of IMF resources.

QUESTIONER: Yes, I have two questions about the goals that have been stated. One is brief prioritizing of the development projects. If you could kindly expand on what development projects need to be pre-prioritized and also about the tax infrastructure. Does that imply agricultural tax?

MR. DI TATA: On the development projects, the government is making its own prioritization. What the program envisages is a reduction in the fiscal deficit, which reached 7.4 percent of GDP in 2008/09, to a level of 4.2 percent of GDP this fiscal year. Most of the adjustment is expected to take place through the elimination of fuel and electricity subsidies, but there is also a reduction in development spending through better prioritization of projects. Some projects that the government considers not a priority will be postponed or eliminated.

Your second question was about taxes. You know that the tax ratio in Pakistan is relatively low by international standards—and in 2008/09 we have an increase in the tax ratio in the program on the order of half percent of GDP, which is going to be achieved mainly through tax administration measures. The program assumes a strengthening of tax audits and of the Large Taxpayers Unit, and it also incorporates the impact of the increase of one percentage point in the general sales tax, which already has been implemented.

In the medium-term the government wants to increase the tax ratio significantly by between three to four percentage points of GDP through the year 2012/13. And this will require a number of measures, including elimination of exemptions in the general sales tax, elimination of exemptions for the income tax, including possibly commercial agriculture, and also, at some point, introduction of a value added tax with a minimum number of exemptions.

This is more of a medium-term issue. These measures are going to take some time to be implemented. So for the first year of the program, the focus will mainly be on tax administration.

QUESTIONER: Yes, I just wanted to return to this issue of how much donors will need to help Pakistan meet its financing needs. You mentioned gross external financing of $13.4 billion in FY08/09 and of that the IMF is expected to provide $4.7 billion.

So of the remaining gap, what would donors need to supply and are you confident that Pakistan will be able to find that money?

MR. DI TATA: This is an important question. I want to clarify it.

I mentioned these gross external financing requirements of $13.4 billion in 2008/09. These gross external financing requirements are the critical part of the program and they are already covered. They are covered by our projection of what is going to be foreign direct investment in Pakistan, and by commitments already made by other international institutions including the World Bank, the Asian Development Bank, and the Islamic Development Bank, some money coming from bilateral donors for projects, and the IMF.

But as I said, this is the critical financing of the program, but we also need additional donor assistance to cover the social safety net. The program also allows for adjustments in development spending, so that if additional donor assistance is obtained, then the fiscal deficit could be increased up to a certain level to accommodate that additional spending financed with donor support.

And this is what I think the government, with our support and the support of the World Bank, will be seeking in the next two months: to get additional donor support to cover the expanded social safety net envisaged in the program and reduce the government's domestic financing requirement, and also to allow for higher spending, to the extent possible, on development projects.

QUESTIONER: Was this the basic purpose of the meeting of the Friends of Pakistan earlier this month? There was some expectation that there might be some announcements of additional aid from that meeting once the IMF loan is approved.

MR. DI TATA: My understanding is that the Friends of Pakistan meeting was mainly an organizational meeting and there were no pledges during the meeting. But it was agreed during the meeting that there was going to be another meeting in Islamabad probably in early January at the ministerial level and I guess the issue of donor support will be part of the topics to be discussed in that meeting.

QUESTIONER: I want to get back to the reprioritization of development programs and at the same time increase of the safety net from 0.6 of the GDP to 0.9, do you think that delta of 0.3 percent is sufficient to cover the risk that may come when Pakistan is ready to reprioritization of the development program?

MR. DI TATA: Regarding the social safety net what the program envisages is a larger increase than the one you mentioned. We are envisaging an increase from about 0.3 percent of GDP in FY 2007/08, to 0.9 percent of GDP in FY 2008/09. So it's an increase on the order of 0.6 percent of GDP this fiscal year.

How this is going to be done, is being discussed. Part of this increase is already included in the budget through the Benazir income support program, which requires a better targeting. And then, the program allows for an additional increase of 0.3 percent of GDP. That will probably need to focus, in the short run, in expanding some other existing social programs thatare already better targeted. And then there will be a discussion with the World Bank to formulate a more comprehensive program of social safety net spending.

And as I said, the program is also flexible to the extent that if there is more donor support that could be obtained, then that would allow for higher development spending than the figures we have already incorporated in the program.

Let me just mention about the availability of the documents related to the program. The government has already consented to the publication of these documents, and they will become available shortly.

QUESTIONER: I just wanted to clarify something about the gross external financing. You're saying $13.4 billion, $4.7 from IMF and $3.8 billion has already been committed from other agencies, World Bank, Islamic Development Bank? And my second question is one of the key problems that we're seeing in Pakistan right now is the government borrowing from the central bank and just from July 1st to now it's been about $2.48 billion.

So is there any plan how the government is considering how to get at the net zero government borrowing?

MR. DI TATA: Let me clarify again. The gross external financing requirements for 2008/09, as I mentioned, are $13.4 billion. This includes the external currentaccount deficit plus amortization of medium-term and long-term debt and maturing short-term debt. And out of the $13.4 billion, the financing, not including the Fund, is about $8.7 billion. That includes FDI on the order of $4.5 billion, plus also medium- and long-term borrowing from multilateral institutions including the World Bank, the Asian Development Bank,the Islamic Development Bank, and some financing from bilateral creditors for projects.

Then there are a few items that are not so important, but then the remaining gap on the order of $4.7 billion will be filled by IMF resources in 2008/09.

You also asked about government borrowing from the State Bank of Pakistan. Yes, this is a very important issue. We agree with you that it needs to be corrected. The idea in the program is to discontinue this borrowing for the period between November - June of this fiscal year. And in order to eliminate this borrowing from the central bank, what is important is that in the auctions of Treasury bills, the interest rates will have to be sufficiently attractive for commercial banks to purchase enough Treasury bills, so that the domestic borrowing requirements of the government is covered through commercial bank sources, and also from other non-bank sources like Pakistan investment bonds, for instance, and the national savings scheme.

QUESTIONER: My question earlier was about defense spending and whether or not that had been a topic of discussion and what conclusions were reached on that issue.

MR. DI TATA: The issue of defense spending was not discussed during the programnegotiations. Defense spending is basically an item that was determined by the government and included in the budget projections for this fiscal year. There was no discussion of this topic.

MS. KAMATA: Thank you very much for joining this conference call.


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