November Issue 2015, October Issue 2015
Interview: Harald Finger, IMF mission chief to Pakistan
Pakistan has been following the path prescribed by the IMF, but have you ever emphasised working for job creation in the economy?
Economic stability brings greater predictability and confidence. Both are critical pre-conditions for sustainable growth and job creation. Pakistan’s success in reducing near-term risks, improving the fiscal balance and strengthening international reserves has helped strengthen the country’s medium-term growth prospects. In our dialogue with the authorities we emphasise two key priorities. One priority is to solidify these gains in stabilisation and to make them irreversible. The other equally important priority is to implement reforms to overcome long-standing obstacles to higher investment and growth. Critical reform areas include eliminating the still pervasive power outages by increasing generation capacity and bringing the sector toward cost recovery, broadening the tax net and strengthening revenue collection to generate additional resources for priority spending in areas such as infrastructure investment, health, and education; restructuring or privatising ailing public sector enterprises; and strengthening the business climate to facilitate higher investment and private sector job creation.
Are you satisfied with the government efforts to increase tax revenue?
The authorities have made progress by increasing the number of active taxpayers and raising the tax-to-GDP ratio in the past two years. That said, the tax revenue-to-GDP ratio remains low compared to similar economies and there is significant scope for broadening the tax base and improving tax compliance in order to reduce the budget’s reliance on borrowing and to increase the fiscal space for much-needed infrastructure investment and social assistance.
Government borrowing from commercial banks is eclipsing private sector demand for credit. Why isn’t the IMF advising the government to curb this tendency?
As long as there is a substantial fiscal deficit, there will be significant financing needs. External commercial borrowing and donor-funding are limited and, domestically, the commercial banks are the most significant source of funding. The authorities’ strategy, which we support, is two-fold. Critically, there is a need to further reduce the deficit to shrink the overall financing need and, by extension, the borrowing from commercial banks. At the same time, monetary policy needs to take the government’s borrowing from commercial banks into account and leave enough lending capacity for banks to finance an adequate amount of private sector credit. This is a key element in our discussions and in the IMF-supported programme.
The IMF demands reductions in power subsidies but remains shy of advising the government to tax agricultural income. What is your opinion on this?
In Pakistan as elsewhere, generalised power subsidies are inefficient. Power subsidies disproportionately benefit the wealthier segments of society rather than the poor who are in need of support. Pakistan has rightly brought down its energy subsidies and focuses the remaining support on those segments of society who consume less energy, including lifeline tariffs for the poor. In a constrained budgetary environment, the resources that have been freed this way can be put to better use including, as mentioned, for infrastructure and social spending.
Adequately taxing the agriculture sector would significantly help in broadening the tax base and raise urgently needed revenue. However, under the current NFC award, the provinces, who have the authority to tax the agriculture sector, receive significant amounts of resources from Islamabad, and have therefore less of an incentive to increase the revenue intake from taxes on agricultural income (or, for that matter, taxes on property or services). There is a need to revisit this issue in the context of the NFC discussions, with a view to arrive at a formula that is fair for both the federal government and the provinces, and that creates the right incentives for all levels of the government to strengthen their tax efforts.
In an effort to clamp down on the undocumented sector of the economy the government imposed a withholding tax on all banking transactions, will the IMF support this stance of the government?
We support the authorities’ efforts to improve tax compliance and widen the tax net. The withholding tax for non-filers raises the cost of being outside of the tax net and could thereby help reduce the informal economy and strengthen tax compliance. At the same time, it will be important to monitor the effects of this policy on the level of intermediation in the banking sector. It will also be critical for the FBR to facilitate the transition into the tax net of those who decide to file their taxes in order to lock in these gains.
The level of domestic and foreign debt is rising. Why is the IMF silent on this issue?
The strategy of reducing the budget deficit and fiscal financing needs, under the IMF-supported programme, is also the strategy to reduce public debt. The fiscal deficit path under the programme allows for a gradual decline in the ratio of debt (both domestic and external) to GDP in FY 2015/16 and beyond.
After provincial autonomy was granted through NFC awards, there was so much room to cut the size of the federal government. Can the IMF suggest measures that may be helpful?
There is some space to reduce public expenditure that is inefficient, such as energy subsidies which mostly benefit the rich and should be replaced with measures that are better targeted at the poor and are more cost-efficient. At the same time, Pakistan needs to expand its infrastructure investment and social assistance in a fiscally prudent way. Therefore, the core of the authorities’ fiscal programme is to widen the tax net in order to create the space for such expenditure.
The current IMF programme will end by September 2016. What priority measures need to be undertaken by our economic managers?
As mentioned, it will be important to use the remainder of the programme period to follow through on priority policies, especially solidifying the gains in stabilisation and tackling structural obstacles to growth. Decisive reform implementation would put Pakistan in a relatively strong position by the end of the programme.
In the near future, the China-Pak Economic Corridor (CPEC) could become the economic nerve centre of our country. In order to reap the benefit of this gigantic project, how should we prepare ourselves ?
The CPEC carries a significant potential for boosting Pakistan’s growth, both in the short-term and in the medium-term. Reaping full benefits of this project will require improving the country’s competitiveness through an enabling business environment and structural reforms. Alongside, fiscal costs and risks associated with the financing side of CPEC need to be managed and monitored carefully. This requires sound practices in the evaluation, prioritisation and implementation of individual projects, along with strong procurement and public financial management systems. Power purchasing agreements need to be agreed upon in a way that mitigates fiscal risks, and execution of infrastructure projects needs to be prioritised in a manner that the investment remains within an overall budget envelope aimed at gradual debt reduction.
This interview was originally published in Newsline’s October 2015 issue.