IMF says Pakistan bailout sets ambitious fiscal targets

ISLAMABAD (Reuters) – The $6 billion loan program for Pakistan approved last week by the International Monetary Fund will require “very ambitious” fiscal measures and sustained commitment for the bailout to succeed, officials said on Monday. IMF officials.

The three-year deal approved by the IMF board last week, Pakistan’s 13th bailout since the late 1980s, saw a sharp drop in the value of the rupee after the central bank agreed to a “flexible exchange rate, determined by the market”.

It also provides for structural economic reforms and a broadening of the tax base to increase tax revenues by 4 to 5 percentage points, which are currently estimated at less than 13% of gross domestic product (GDP).

With slowing growth, a budget deficit that has climbed to over 7% of GDP and foreign exchange reserves below $8 billion, enough to cover 1.7 months of imports, Pakistan is on the brink of a debt and balance of payments crisis.

Pakistan Fund mission chief Ernesto Ramirez Rigo said the goals of the program were tough, but Prime Minister Imran Khan’s government, which came to power last year vowing not to turn to the IMF , was engaged.

“We certainly believe that debt sustainability under the program will be assured,” he said in a conference call with reporters, adding that this would require “very ambitious” fiscal consolidation, mainly through better revenue collection.

Pakistan has a notoriously narrow tax base, with less than 1% of its 208 million people filing tax returns, a large informal economy and several key sectors of the formal economy largely exempt from taxes.

The IMF loan and accompanying reform package will unlock an additional $38 billion in loans from other international partners, but the Pakistani authorities’ commitment to pushing through the reform was essential, Ramirez Rigo said.

“Consistency and sustained implementation are key.”

The 2020 budget, passed last month, approved tax measures of around 1.7% of GDP to help reduce the deficit and Pakistan has pledged a multi-year effort to overhaul its tax and budget system to strengthen its public finances. .

A central part of the program will be to clean up accumulated debts in the electricity and gas sectors and in loss-making state enterprises, including Pakistan International Airlines, Pakistan Steel Mills and Pakistan Railways.

Accumulated losses in the electricity sector now amount to the equivalent of 4% of GDP, posing a serious fiscal risk, while losses in the three major public enterprises amount to 2% of GDP , the IMF said in a report on the package.

The tough terms of the package, which has already seen interest rates raised by 150 basis points and which will see a series of tax loopholes closed, have already sparked resentment among households facing inflation of around 9 %.

Ramirez Rigo said there was a risk that the difficulties in implementing some of the policies in the package would be “more complicated than we had assumed” and that there would be problems reaching consensus behind reforms.

He also said that any sharp rise in oil prices could unbalance the reform drive given Pakistan’s heavy reliance on imported energy.

Reporting by James Mackenzie; Editing by Alison Williams

About Lucille Thompson

Check Also

Top 10 Strategies to Boost Your Credit Score in No Time

Your credit score is the most important indication of your financial situation. It gives lenders …