Transcript

Transcript of a Conference Call on the Completion of the Second Review of the Stand-By Arrangement for Pakistan

August 10, 2009

MR. MAZAREI: Good afternoon, ladies and gentlemen. The Fund’s Executive Board today agreed to increase its lending to Pakistan by an extra $3.2 billion to fund priority spending, and help the government provide assistance to several million internally-displaced persons.

I would like to note that the key program objectives have been achieved, despite very difficult political and security conditions. First, there has been a sizable fiscal consolidation, and the budget deficit this year fell by 2.5 percent of GDP, combined with the strengthening of the social safety net. Two, inflation has declined considerably. And, third, as a result, external stability has improved.

The additional financing for Pakistan was approved to help Pakistan bolster its official foreign exchange reserves and help protect it against external shocks, such as a potential surge in oil prices. It will also help accelerate priority spending by the government, including by providing assistance to internally-displaced persons and strengthening the social safety net.

Fund disbursements for the budget financing are intended as bridge financing until pledges made by donors last April in Tokyo for Pakistan materializes. Here, I must stress that because IMF financing for the budget is temporary. It is very critical that donors deliver their pledge support without any delay.

Fund financing will also help the authorities implement key reforms, especially in the area of government revenue mobilization, and this will include preparations for the introduction of a value-added tax.

Higher government revenues are important in order to enable an increase in social spending, including on health and education, and also generate resources for much needed public investment in infrastructure to jumpstart growth and combat poverty, which remains a major problem in Pakistan.

I will be very glad to take your questions now.

Questioner: The Pakistani authorities had signaled they asked the Fund for $4 billion. I just wanted to know if that’s what they effectively asked and why they were given less than asked.

MR. MAZAREI: The Pakistani authorities have asked for the same number as that we gave them, $3.2 billion. In addition, and this is slightly technical, as you may know, members of the IMF this year are being given a Special Drawing Right allocation, SDRs, to bolster their reserves, and Pakistan is getting about $1 billion for that purpose. That is not a part of the program, but, together with the $3.2 billion, that is roughly the $4 billion that authorities had asked for. To reiterate, the authorities have obtained what they asked for, which was 200 percent of their quota.

Questioner: I am wondering if you could spell out a bit what sort of steps that you would want to see Pakistan take to help fix its problems. As you know, in terms of reserves arriving over the last few months, we have seen them decreasing again, but the situation seems to have increased, and then gotten worse again. One of the big issues, as you know, has been its discipline with regard to the budget. What measures and conditions have been put in place for that?

MR. MAZAREI: There are several areas, which have concerned both us and the Pakistan authorities themselves. As you mentioned yourself, fiscal discipline is a key issue.

In the fiscal year that ended this July, the budget had a slippage of 0.9 percent of GDP. Some of this was due to unexpected spending on internally-displaced persons, some of it was also due to anticipate security (inaudible), but, at the same time, there was a shortfall in revenue and some excess spending by the provinces.

Looking forward, we’re asking the authorities to maintain fiscal discipline, and they have put in place mechanisms to have better discipline over provincial spending. And, of course, the budget for this year allows for spending on internally-displaced persons.

What we are also asking, and these I must stress are critical issues for Pakistan looking ahead, are tax administration and tax policy reform. Currently, there is a problem of taxation being very small relative to gross domestic product. Much of the burden of taxation falls on manufacturing and the services sector, and rural areas and agricultural land and income are not taxed. And, under the program, we are looking forward to these being resolved.

One of the key issues, as I noted, is the introduction of a value-added tax. This value-added tax will hopefully raise government revenues and significantly broaden the tax base.

Questioner: You had said that the donor countries should come forward with support for Pakistan. What are you hoping to achieve from next month’s Friends of Pakistan meeting when major economic powers will be meeting in New York?

MR. MAZAREI: Well, this new meeting that is going to take place is somewhat different, although a follow-up, to the general process of the Friends of Pakistan net. In Tokyo, pledges of about $5.7 billion were made over the next two or three years. And we are encouraging the donors who made those generous pledges to follow through, and I’m sure the forthcoming meeting of Friends of Pakistan will be an opportunity for Pakistan to make its case and for donors to accelerate the pledges.

Questioner: I see in the press release that the Board granted a waiver to legislative amendments to increase the effectiveness of bank supervision. I wonder if you could say if that’s extended for a particular period of time. And, also, I did not see any mention of this power subsidy. I thought that IMF had asked that that be eliminated by July 1. At least it has been reported some places that that is, but I do not see it in the press release.

I also saw an article about the consolidation of ministries in Pakistan, including the Ministry of Human Rights is somehow being something directed by or requested by the IMF. Can you comment on that?

MR. MAZAREI: Let me start with the last question on the consolidation of ministries. I think it is very good for a government to be lean and mean in this administration, but the Fund has had nothing to do with that particular recommendation. We do not micromanage government organizations; we make general recommendations about the level of spending. We do not get involved in how many ministries government should have or not.

On the issue of electricity, electricity sector, as you are aware, is a major drain on the economy of Pakistan. Because of ongoing recurrent blackouts, GDP growth and manufacturing output and generally welfare of consumers is very much undermined. At the same time, because of well-known and long-lasting problems of areas of customers not paying the power companies, the government putting in place price limits on electricity, which has created also some financial problems with electricity sector, investment in power and energy in Pakistan has been very low.

The World Bank and Asian Development Bank have recently agreed with Pakistan on a set of measures to help improve the finances of the electricity sector, taking care of the problem of inter-enterprise areas, which is in Pakistan known as circular debt. At the same time, the Asian Development Bank and the World Bank have agreed with the Pakistani authorities on possible increases in electricity prices in the period ahead such that by August of next year, electricity tariff differential subsidies will be eliminated.

You are absolutely right that the authorities had intended to eliminate the subsidies by last July, but because of political considerations, because of social issues, these increases have been delayed.

Now, on bank supervision, you are absolutely right. The authorities had indicated that they would like to increase the powers of the Central Bank in the area of bank supervision, but they have been delayed in implementing this, and they are going to do this by September 1, hopefully. And the waiver doesn’t have a time limit, but the authorities have committed to do this, and in a short while from now, and that should be okay.

Questioner: Could I just ask was there not a waiver given on the power subsidy or was the commitment made by the government not as sort of binding, or does the press release just not contain all the waivers that were given?

MR. MAZAREI: There was no conditionality on the electricity sector. What we put down officially as performance criteria, which we will not have anymore going here forward because policies in this area have changed, used to require waivers. Now, the reason there was no waiver for electricity, as I said, was because there was no formal conditionality on this. And this area, the issue of electricity is formally in the domain of the World Bank. We are interested in it by and large by of its criticality in terms of macroeconomic policy for the government finances and for growth.

Questioner: Mr. Mazarei, I was wondering, this policy meeting on August 15, do you think that Pakistan should be raising rates right now or as a release that needs to be (inaudible) to just inflation expectations? What is your view, generally?

MR. MAZAREI: Well, as you know, inflation has come down considerably since November of last year, when it reached a high of 25 percent to roughly 13 percent right now. And, so, that allows for some consideration of rate cuts. At the same time, there has been pressure on output and manufacturing output, and textile exports have come down significantly. Looking forward, there are several factors that should go into determination of interest rates.

One, the authorities will have to take into account the new inflation numbers that will become available in August covering through the period of July of this year. They have to follow the fiscal developments, which have been expansionary. Reserves have come down a slight bit, too, since the end of June. So, we hope that in the next few days, more data will become available based on which authorities can consider what to do in this area.

Questioner: A follow-up, I was wondering if you think that the donors should be coughing up a little bit more money to help with the financing need, considering increased security risks going on in Pakistan right now?

MR. MAZAREI: Well, Pakistan is incurring considerable amounts of fiscal spending on security issues and on the social problems that emanate in part from those security issues, such as the internally-displaced persons, and the need for the reconstruction of areas affected by these security developments.

It is very important, as I said, especially with regard to the pledges made in Tokyo to deal with the social spending needs of the Government of Pakistan, but, also, to consider additional funds that could be directed to the problem of internally-displaced persons. Several donors, such as the United States, the European Union, and Turkey have been providing funds to Pakistan expressly for the purpose of dealing with IDPs.

Now, some of these funds do not go through the budget of the Government of Pakistan, they go through the UN agencies, they go through NGOs, or other actors, and those are fine, and it is very important to deal with this major humanitarian problem right now.