Transcript of the Conference Call on the Release of the IMF Staff Report on the Extended Fund Facility Arrangement for Pakistan

July 8, 2019

Ernesto Ramirez Rigo, Mission Chief for Pakistan, Middle East and Central Asia Department
Olga Stankova, Special Assistant to the Director, Communications Department

MS. STANKOVA: Good afternoon, everyone, and good morning to those who are joining us in the morning time. Thank you for joining us for this call on the release of the IMF Staff Report on the Extended Fund Facility Arrangement for Pakistan.

The conference call is on the record and it is under embargo until 11:00 a.m. D.C. time. You also have available for you the staff report and associated documents under embargo until 11:00 a.m. Washington time.

With this I will pass the microphone to Ernesto Ramirez Rigo, Mission Chief for Pakistan in the IMF Middle Eastern and Central Asia Department. Ernesto will make opening remarks summarizing the staff report and then we will open the floor for questions. Over to you Ernesto.

MR. RAMIREZ RIGO: Thank you very much, Olga. Good morning for those that are in our time zone, good afternoon for those that are in Pakistan time zone. My name is Ernesto Ramirez Rigo I'm mission chief for Pakistan as Olga has explained. Let me just give you a brief review of all the documents that you are going to be seeing or that you see under embargo currently.

Obviously, the overarching objective of the authorities program is to restore external and internal balance in Pakistan so that Pakistan can resume sustainable growth.

I think the government's program that is now supported with the Fund program has two main pillars and then I will develop a little bit each one of them to explain them. The first pillar is obviously macroeconomic stabilization. The second pillar is to strengthen and build institutions.

On the first pillar of macroeconomic stabilization that is critical for restoring external and internal balance. The focus on the fiscal side given the large deficits and the high debt is to basically improve revenue mobilization.

Throughout all of our discussions with the authorities and other stakeholders, I think we all came to the same assessment and it is the main problem in Pakistan its low level of revenue collections relative to GDP and relative to many other emerging markets and peer countries. So there is where we have put the focus.

We have put the focus on increasing revenues by broadening the tax base, not by increasing tax rates while making sure that the share of population contributing to revenues is increased and in trying not to continue with exemptions and concessions which have been a major source of leakage in the tax base.

In addition to that, of course, given the external sector conditions, we have put focus on having a flexible market determined exchange rate which should help restore balance, and which is going to help develop the local financial markets which are fundamental for growth and in the medium term every country needs to have financial deepening. The flexible market determined exchange rate will also improve the conditions for local producers and for the exporting sector.

In addition, there is a third pillar on the macroeconomic stabilization is basically increasing social spending. As everybody knows and as you probably have already analyzed the budget, there is quite a substantial increase on some of the social programs included in the budget. That is something that we very much welcome and we definitely wanted to make sure that the adjustment was on the revenue side, not on the expenditure side and I think the budget sends quite a strong signal in that direction.

Now let me turn to the other main pillar of the adjustment which is building institutions. This is going to have to be done in parallel, so it is not the sequencing is going to be -- is going to follow at the same time as the macroeconomic stabilization is put in place.

And this is basically about improving business, doing business in Pakistan. About reducing red tape, streamlining the regulations, having tax policy reform that includes the tax system in Pakistan which we all know is very complex and difficult to navigate and is not something that businessmen look at as a positive.

We want to have increasing investment and obviously there will have to be an accompanying reduction in consumption. So more investment, less consumption, more exports, more green field operations in Pakistan is something that we are looking for. And we are also going to -- we are also hoping that through improved tax compliance and a new system of tax administration that will be quite an incentive for investors.

The IMF program basically is going to act as a catalyst where we basically provide a framework on which many other international partners are going to be participating. And the total amount of financing that the program is going to be unlocking is around $38 billion. I think you might have seen already that in our press release after the approval of the program.

Basically, the Fund opens the door for bilateral countries and multilaterals to also extend the financing to Pakistan. The World Bank, the ADB, the Islamic Development bank, and so on, to also come in and provide additional financing. This financing should -- will help release pressure and allow time for the reforms to take hold in Pakistan.

I think with that I'm going to leave it at that and we can answer your questions.

MS. STANKOVA: Thank you very much, that was a very comprehensive description of the program. And now, Ryan, please help us and moderate the question and answer session. We will take the question from the journalists now.

QUESTIONER: My question is that the IMF has demand from Pakistan that detail of CPAC debt (inaudible) Pakistan will get from China and is it possibility that Pakistan can pay back CPAC amount from this $6 billion. And (inaudible) can Pakistan pay back to (inaudible) already give Pakistan almost $5 million. Can Pakistan pay back from this amount these (inaudible) and UAE amount and interfere with the CPAC (inaudible) pay back by IMF amount?

QUESTIONER: Thank you very much. Hello, good day and good morning in D.C. and good night here. The question is that the budget that has just been announced has set a target for the largest, the revenue connection jump in a fiscal year that’s probably been seen in a very long time. Some people say that the 37 percent jump is a record in Pakistan's history. But in any -- at any rate, it’s a very major jump.

Is this achievable because there is a lot of skepticism on the ground here from various quarters and that’s not just because of the slow down which will definitely come with the economy but also because of the working of FBR, the Federal Board of Revenue, the tax collection agency which seems to have a number of internal issues, it's not just corruption, but also issues related to inefficiency and outdated systems which haven’t been reformed, fine-tuned over time. So if you could address that please. Thank you very much.

QUESTIONER: Can you give us an idea of how Pakistan's external financing requirements are going to increase over the program period and beyond? And whether or not how realistic is it to understand that this will be Pakistan's last IMF program. And how far the conditions help establish the grounds to break this cycle of eternal return to the IMF that Pakistan has been stuck in for the past 30 years.

MS. STANKOVA: Thank you. At this point we will start answering questions.

MR. RAMIREZ RIGO: I'm going to answer the questions in the order that we received them. I think these are very good questions that have been asked. I think many, many other people are wondering exactly the same type of things about whether debt sustainability is at hand, whether there is debt transparency in the budget, the revenue targets, tax administration and external financing so I'm going to start with the first question.

I, we certainty believed that we have everything that is necessary for us to do our debt sustainability analysis. And in fact, you will see in the document that there is quite an extensive discussion about the debt position of Pakistan, the government of Pakistan.

Let me also clarify that this information has been available for a long time in the information that the government publishes in its economic survey annually. And of course, that information has been supplemented in our discussions so we do not have any doubt that we have the necessary information.

Now you mentioned, somebody mentioned the issue of capacity to repay. On the basis of the information that is available we certainly think there is debt sustainability under the program is going to be assured.

It does require though a very ambitious fiscal effort. It does require that the international partners contribute by maintaining exposure in Pakistan during the program period, but we do feel that there is, the conditions are in place of this.

In terms of the budget revenue, as I said at the beginning, the focus was on revenue increasing and not on expenditure cutting. It’s a very ambitious budget like the program it is. The authorities definitely have a strong commitment to turn around a page on this issue of no revenue collections.

I think that in terms of the revenue side there are several components that go into forming these numbers that have been talked about. One is tax policy driven. Two is the impact of the economy.

On the tax policy front, we don’t have any doubt that this is going to be, that this has been done. It's -- all the exemptions that were eliminated in our estimation with, together with FBR amounted to nearly 1.7 percent of GDP. The second component though, is more complicated to estimate, which is what's the impact of the economic growth and the impact of tax administration capacity in collection. We do recognize this is a race, but the it is a long-run race and the authorities are strongly committed to improving the tax administration. Our colleagues at the World Bank have recently signed quite an extensive program with FBR to improve tax administration. It's going to require work, yes, but is it not an impossible work to do.

Now, in terms of the external financing, I would say that what we actually expect is external financing to be declining, not increasing. That's the whole purpose of the program and of our program. So, external financing will decline over time. The financing is going to be obtained from the international partners as we are basically reporting in our document. Critical to it are going to be the multilateral institutions, ourselves as well, but, of course, as well, China, Saudi Arabia and the UAE. And I think whether this is the last program or not, that's really what matters whether we set the stage for the lasting improvement and conditions in Pakistan for sustainable growth and for external and internal balance. We certainly think there is hope that this program will set those conditions and this is why the IMF Board supports the program.

QUESTIONER: Thank you very much and thanking the Chair (inaudible). There seems to be a lot of skepticism especially among people outside the government who will be to the extent to which this program will succeed and part of that has to do with Pakistan's own (inaudible) kind of programs. But there are lots of people who also believe that after the last program in which Pakistan got a record number of LIBOR, 13 LIBOR altogether under former Prime Minister Nawaz Sharif that this time around, it would be somewhat awkward for the IMF to swing the pendulum to the other extreme, to go completely tight especially in a situation where the economy is definitely going to slow down further. What do you report on that? And also, if I may ask you, on the future of Pakistan, you said you're not making public sector companies which continue to do such a big drain on the economy, it's sort of fact that the government has promised to speed up the process of privatization, but these promises have been made (inaudible) over the years and what we've seen is that progress has lagged behind, lip services or promises, how can an ordinary Pakistani be convinced that this time around, the future is going to be different?

QUESTIONER: I'm sorry, I missed a little bit of the earlier part of the call. What I wanted to know were two things. First, if you can give a bit more detail on the rest of the money. I think the segue you used in your statement was 36 billion, which is going to come forward as part of this IMF program. Where all is that coming from? Sorry, 38 billion and secondly, (inaudible), the government is forecasting a very sharp, an economic slowdown. Growth is basically going to have compared to a couple of years ago. So, how fast do you think the economy can recover, or is this going to be a prolonged period of very slow growth?

QUESTIONER: Good morning, my question is do you think that change in Pakistan is near to the reality, or is there more potential, or do you think it should be more depressed against dollar? And the second question is do you think that Pakistan launched (inaudible) Eurobond in interests of two to three months? Is that a good time for Pakistan to launch (inaudible) all Eurobond?

MR. RAMIREZ RIGO: So, I think, unlike before, I'm going to start from the last two questions and then come back to the first one that was asked. In terms of is it a good timing for the Eurobonds and accessing the market, well, that's something that the authorities need to decide on the basis of their own market intelligence and market analysis. Obviously, normally, after an IMF program approval and given that the authorities have taken some very significant and good policy measures, conditions tend to improve.

I think especially international investors do look at international support from IFI as an indication that the policies are in the right direction. So, perhaps that is a bit of a window of opportunity, but at the same time, it is definitely up to the authorities to decide when the timing is best.

In terms of the exchange rate question that was asked, I think the exchange rate is already in reality because essentially as the Governor has explained previously, the exchange rate regime has moved to a flexible market determined exchange rate. So, at the moment, the market, that's what it's thinking that this is the right exchange rate.

Now, in terms of the financing that has been mentioned, the $38 billion includes the IMF, includes the multilaterals, World Bank, ADB, IDB and so on (inaudible), China, Saudi and EUI and then, I'd just like to turn to the more complicated question about a skepticism. I mean, I think it's quite understandable that there is a skepticism outside the government in terms of the program.

There is no denying that we have Pakistani are repeat adducer of IMF resources. The international community obviously has also this issue, but what we like to emphasize is that the (inaudible) have the results to implement the program that has a lot of upfront action.

They've done and with even in the budget in this occasion we're aiming for revenue mobilization through elimination of tax exemptions and privileges that in the past we have not addressed. That gives us also comfort that there is political will to implement it, but this is not going to be assured a (inaudible). It's going to be -- it is like the marathon. There are a lot of things that need to be implemented, especially in the structure outside that is really critical. But the whole thing is whether this thing is going to be different or not from the past is going to depend very much on the Pakistanis. It doesn't -- one thing is to provide a macroeconomic framework and to receive support from the international partners, but ultimately, the consistency and the steadfast implementation is key. Not only during the program period, but also, after the program period. Let's not forget, Pakistan has already legislation in place like the Fiscal Debt Responsibility Legislation Act, which in principle should have limited the quantity of fiscal deficits and debt, but if it is not implemented, there might be another day no matter whether there is a good successfully completed program or not. This is not going to improve conditions. But this time around, I think, at least the starting point is a strong one and we certainly think there is the commitment.

Turning to the issue of the state of enterprises that someone correctly identify as a major drain on the budget. Obviously, we agree, the authorities agree, it is in the program, but the issue is not only about privatization, far from it. I think the way we are thinking, and the authorities have been thinking about it, is let's start doing first a triage, basically, look at all these major state of enterprises. Let's decide which ones are in good condition and should be run more commercially; which ones are in bad condition and should be considered for either closure or restructuring; and let's see which ones should not be in public hands at all and should be privatized. And that is going to take some time.

There are some targets in the Memorandum of Economic and Financial Policies and you will see the dates there. In addition, we have also agreed to do audit on the three main states of enterprises, PIA, the railway company and the steel company which I think is very important to improve transparency and get a good understanding on exactly what is the problem in this company. And then whatever the decision is, the authorities have a few things in the store, but on the positive side from the perspective of the program, this privatization is really not something on which we are counting at the onset as an additional source of known tax revenue.

QUESTIONER: I work for the News and my question is, as you had mentioned that there is more focus on revenue side. There is the fiscal consideration, for instance, you have already projected the budget deficit of 7.3 percent of GDP in the current financial year. The DWI started off at 7.1 percent and I want to remind you already the basis of the budget making is already shaken. For instance, FDR's device target of 4150 billion, they have missed around 300 billion rupees. So, the whole business of the varying target of rupees, 5.5 billion have already shaken. So, how LBR is going to achieve around 43 percent growth which had never happened in Pakistan history? What shall we (inaudible)?

QUESTIONER: There's an indication that the governances are ready to offer and place their (inaudible) GDP 3.7 versus GDP of the last two years, what is the assurance that they'll deliver on this promise when they have not been able to deliver on Bank (inaudible) delivery target? And second, there are a number of educations where that suggests Pakistan are going to introduce a number of laws to get them passed. Given the moderate strength of the (inaudible), how do you think it is achievable.

MR. RAMIREZ RIGO: Excuse me, sir. Could you repeat the last part of your question? The sound was very bad and I couldn’t catch it. I understood the first part about the provinces and the fiscal objectives, but not the second.

QUESTIONER: You know, the indication that Pakistan (inaudible) has asked you change their large -- in different areas including that indication and many others. Given the (inaudible) percent of the PPI going back in Pakistan how would we expect such (inaudible) can be part.

QUESTIONER: I just have two very short questions. One is: by when is the Fund now expected to be dispersed, and exactly date does the program -- can we say that the program has begun? And by when will Pakistan actually receive the money? And number two, are we reading this program correctly? If we understand, that it seems to be rather light on structural reforms, because I'm not seeing a lot of commitment for structural reform here, aside from perhaps revenue increases, so increases in the tax base at the outset of the program?

MR. RAMIREZ RIGO: So, I'm going to start with the first question about revenues which if I understood correctly, it's asking whether the revenue target can be achieved. Let me first clarify, at the beginning of the question the gentleman mentioned that there is not adjustment because the fiscal deficit is basically almost unchanged compared to the previous one.

I think what people are missing, and it's very, very important to focus on, is that the targets are set on the primary balance, and not on the overall balance, and the reason why this has been done, is because the primary balance, is a much better indicator of fiscal efforts in a situation like this one, where the discretion of components of the authority's polices which can be measured, whereas, on the interest bill, which is going to be market-determined, and if it filled domestic market financing, there is no direct control.

So, essentially if you look at the primary balance, that is when you really are going to see, what is that that government is doing, and what is therefore under the program; which is quite substantial and ambitious, and ongoing with that is the issue of revenues.

And this is going to be based on the elimination of tax exemptions, I think most of you have probably read, or even written about the issue of eliminating for the main five sectors, the exemption of GST on domestic sales of their produce or their goods.

That is critical for the objective that SDR has for revenue. Less so is the issue of growth, because obviously on that front we, together with the authorities, are aware that there is going to be some consideration. And also, important, is going to be tax administration improvement, they are already working on it, it's going to be a prolonged effort on the part, but we are hopeful that we will be able to achieve these numbers for the provinces.

The issue of the provinces, you know, and as you know well the constitution granted a lot of autonomy, and basically we have worked together with the Federal Government and the provinces, and met with the Provincial Ministers of Finance to discuss in detail what is included on the fiscal side.

I think we feel that there is comfort in the fact that they have signed memorandums of understandings between the Federal Government and the provinces, a committee meant to the principle of delivering on the fiscal adjustment.

In addition to that, when we met with the ministers we found a lot of understanding on their part that this has a joint effort, it's not just a Federal Government effort. And given that the Federal Government shares nearly 57 percent of most of the revenues with the provinces in automatic way, their willingness was to, as long as they -- the SDR and the Federal Government deliver on the revenue side, they will be willing to contribute to the savings.

Now, it is true that the program includes reforms that require legislative change. For example, very important for us is going to be the independence of the Central Bank, it's going to be important for us and for the authorities as well, the issue of more than the legislation for the state-owned enterprises, and these things will require passage for the National Assembly as in many other democracies.

And yes, the PTI started moderating in the Lower House and not in the Upper House, so it will require building consensus, and that's why in part we tabled the sequencing in a way that will allow for the building of that consensus, and hopefully there will be a possibility that they get passed.

Finally, the program started on the 3rd of July, which is when the IMF Board approved the program. The first disbursement should be either today or tomorrow, already with the Central Bank of Pakistan, and there is structural conditionality that has been mentioned as very light, I'm glad some of you think it's light, I don't think it was seen like that by many other people.

I think we're trying to put the focus on really what matters and to be parsimonious. I think if we can get a list, four or five things early in the program period, for example, independent of the Central Bank, tax policy Reform legislation on its state-owned enterprises, I think that would be really important to cement the gains from the macroeconomic stabilization.

MS. STANKOVA: And to just add in case -- on one of your questions on the amount of the first disbursement, it's about USD1 billion. And then, thank you, the question please.

QUESTIONER: Hi. I wonder if you could tell me, what are the potential risks you're looking at, in particular that -- you know, what are the sort of essential points about the program's successful implementation? And what are the downside risks that the government faces toward getting successful implementation?

QUESTIONER: Thank you very much. I just want to go back to the matter of privatization, and also to echo what (inaudible) said in Iran the program looking short on structural reforms as opposed to a (inaudible) term stabilization. You know, the trouble is that in Pakistan's system, whenever a new government has come to office in the last 30 years, they’ve talked about reforming, restructuring bodies like the PIA steel mills, but it doesn’t work.

One figure making the rounds is that from the last time that the still mill characterization failed more than a decade ago, the most it's so far, in these past 11 years, are equivalent to the cost that would have been incurred for setting up a new mega steel mill in Pakistan. Fundamentally, it seems like a dead causing turning around these companies. Wouldn't it be smarter for Pakistan and for the IMF to push for that end, that these entities are privatized as quickly as possible at whatever cost possible, just so that they stop they stop being a drain on the Federal exchequer?

QUESTIONER: Hello. Sorry. I just want you to reiterate the earlier question about how long you see the sort of stabilization trends lasting so that, you know, when can this government which obviously has some political goals looking forward to growth kicking in again.

MR. RAMIREZ RIGO: I'm sorry I missed answering your question about growth and the stabilization, I missed that. So let me start right away with that one. You mentioned that growth is decelerating sharply. I wouldn't depict it as such, growth is actually expected to be 2.4 percent in this fiscal year compared to 3.3 percent the previous fiscal year.

Obviously, there are several components that have gone into the forecast. One of them is the impact of the fiscal multipliers, and the fact that the fiscal adjustment is going to have on domestic demand, which we expect it to be a drain on domestic demand. At the same time, we are taking into account the improvement and confidence that having a program should have on investors, and on the domestic investors which are even perhaps more important.

In terms of when will growth return? Well, we're expecting growth, I believe, again, at 3 percent the following year, and then after moving towards Pakistan's potential, and in the range of 4.5 to 5 percent before the end of the program period.

So, I think it is relatively shallow the Federation in Economic Activity, because in a way the external position it requires that, and at the same time the external demand at this point, is not as strong as in the past, but at the same time, the initial conditions are probably not one that you could describe as a crisis type of situation.

At the same time that brings us what are those risks to the program. I think there are several risks. One, obviously the price of oil, could provide us a negative surprise for the oil prices increase significantly from here given how big they are, and what a big share of imports they constitute, and how elastic they are domestic demand enterprises. Obviously that would be complicated.

In addition to that, then there are the domestic risks. Perhaps implementation of some of these policies is more complex that we have assumed, consensus is harder to reach and that could slow down the process of program implementation.

Finally, the issue of privatization: well, it is right that some of these companies are a major drain, the program includes quite a battery of measures in it, and that's found to be with the state-owned enterprises. And the question is between frontloading versus gradualism. I think sometimes trying to move too quickly presents challenges, even a local -- legal nature.

Our understanding is that what the authorities want to do provide a better opportunity to do it right this time, and to finally address the issue, a list of these major companies that have been for such a long time, a drain on the exchequer.

MS. STANKOVA: Thank you. I think with this we will wrap up the call. A lot of questions answered. Thank you very much, Ernesto, a lot of grounds covered.


MS. STANKOVA: If you have any questions, of course, please free to email to us, we'll do our best to answer you. You have my email and phone number on Media Advisory.

Just to remind you, the conference call was on the record, it's embargoed until 11:00 a.m. D.C.-Washington Time, which is about another 15 minutes before this can be reported, as well as the documents under the same embargo.

And thank you very much for joining us today. And have a good day. Goodbye.

IMF Communications Department

PRESS OFFICER: Olga Stankova

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