Steel worker in Islamabad: Pakistan has to weigh need for infrastructure spending against fiscal consolidation, IMF says (photo: Ton Koene/Newscom).
PAKISTAN’S PROGRAM
The IMF’s Executive Board approved the latest disbursement under a 36-month IMF-supported loan on March 27 based on the solid progress made to date on Pakistan’s economic reform agenda.
In the following interview, Jeffrey Franks, the IMF’s outgoing mission chief for Pakistan, discusses the country’s achievements at the program’s halfway mark and the considerable work that remains for the country to achieve a true economic transformation. Franks is leaving the Pakistan assignment to become Director of the IMF’s Offices in Europe. Harald Finger of the IMF’s Middle East and Central Asia Department has been appointed as his replacement.
IMF Survey: Can you provide an update on Pakistan’s economy?
Franks: Pakistan has made good progress. When the country approached the IMF for support in 2013, it was on the verge of a balance-of-payments crisis, and that crisis has been averted. Reserves at the State Bank of Pakistan, which had declined to perilously low levels, are now rebounding.
The fiscal deficit, which was extremely large at over 8 percent of GDP in 2012-13, is on track this year to get down below 5 percent of GDP. Not only is the deficit lower, but financing conditions have eased considerably. Pakistan has regained access to international capital markets, and the country has received disbursements from the IMF and other development partners.
The economy grew about 4 percent last year, and we’re expecting a similar figure this year. That’s a good performance considering the country was carrying out major fiscal consolidation. But it’s not enough to substantially improve income levels because of the high population growth rate.
IMF Survey: What has Pakistan achieved in terms of structural reforms?
Franks: Among the key achievements is tackling costly and inefficient electricity subsidies. Those subsidies have come down from almost 2 percent of GDP to 0.7 percent of GDP this year, and they are expected to fall to 0.3 next year. This reduction in subsidies is accompanied by measures to protect the poor. At the same time, the government has been working to increase the energy supply to tackle the country’s huge electricity outages and improve the operations of the generation and distribution companies to make them more efficient.
The government has also made progress on improving the tax system. Pakistan has these so-called Statutory Regulatory Orders, or SROs, which grant tax exemptions and concessions, riddling the tax system with loopholes. At the beginning of this fiscal year, the government eliminated a significant number of those SROs, and it is expected to improve tax collection from that source by about 0.3 percent of GDP this year. Another batch of SROs will be eliminated in the upcoming budget for a similar amount. This and other tax base-broadening measures have yielded good results. The government has also made some headway in administering taxes—catching the people who are evading taxes, making sure that they pay, and collecting taxes in a more efficient manner, but much more is needed.
The authorities have also improved the trade regime and taken some initial steps on improving the business climate and on the privatization of public enterprises. But in all these areas, there’s more work to do.
IMF Survey: Pakistan’s tax-to-GDP ratio is among the lowest in the world. What other fiscal reforms are needed?
Franks: More can be done to increase revenue collection at the provincial level. The division of taxes and responsibilities between the federal government and the provinces is not balanced, and the authorities need to revisit that to avoid future problems with their ability to reduce their deficit and keep it down. Right now, the provinces have a lot of tax authority but little incentive to collect more taxes because most of their money comes from transfers from the federal government.
IMF Survey: What is the government doing to protect the poor as the economy stabilizes?
Franks: There have been two major initiatives under the program. The first was to exempt the lowest consumers of electricity—those using 50 kilowatt hours per month and below—from the electricity price increases. The second was a significant increase in direct cash transfers under what’s called the Benazir Income Support Program. This program provides direct cash transfers to women in about 5 million poor families. The monthly benefit size in that program has increased by over 25 percent over the last two years, and the number of beneficiary families is set to increase by over a million. In addition, the World Bank and others are implementing the second phase of the Income Support Program, which provides an “educational allowance” cash transfer to families who keep their kids in school.
IMF Survey: How can the country maximize the benefits of the recent decline in oil prices?
Franks: Pakistan is a net importer of oil, so the decline in oil prices is a positive shock. We anticipate that this development will save the country several billion dollars a year in oil imports, helping ease the balance of payments problems and allowing the central bank to accumulate reserves more quickly. It should also have a positive effect on businesses’ ability to invest and on growth.
There is some risk that the substantial income that Pakistan is receiving through remittances from workers in the Gulf may be affected. For right now, though, those remittances are continuing to grow, and we don’t expect any short-term negative effect on worker remittances.
We have advised the authorities to take advantage of this positive shock to move more quickly to fix the major imbalances in the energy sector. They are now in a better position to continue, or even accelerate, the reduction of subsidies without increasing consumer prices since world oil prices are going down.
IMF Survey: What are Pakistan’s main economic challenges right now?
Franks: In the past, when the immediate risk of a crisis receded, previous programs often went off track. A key challenge for Pakistan is to continue the policies that it has begun and push the reforms through. Second, Pakistan confronts a major challenge with its security situation, so the authorities have to figure out how to maintain good economic stability and growth in this difficult context. Third, the lack of energy in Pakistan remains a serious constraint on growth.
More broadly, in three years, it’s not possible to deal with all the challenges that Pakistan’s economy faces. There are legitimate concerns about the need to boost education in Pakistan to improve the long-term growth prospects, and we support efforts by the World Bank and others in this regard. The need for fiscal consolidation has meant that infrastructure investment isn’t as high as we would like. And though the authorities have made progress, there is still much scope for improvement of tax administration.
IMF Survey: As you pass the baton to your successor, what are your hopes for Pakistan?
Franks: Pakistan has tremendous economic potential. My fondest hope would be to see reforms in place that allow the country to join those fast-growing emerging market economies that have pulled so many people out of poverty. If Pakistan could have a 7 percent growth rate like India or China and sustain that over a decade or more, there would be an enormous transformation. Over the past two decades, there have been stops and starts along Pakistan’s economic reform path. In order to break out of that stop-go cycle, the authorities need to persist in those reforms until it becomes a virtuous cycle.
