IMF CONDITIONALITY PACKAGE 2013 WHAT TO EXPECT IN YEARS TO COME?

A Joint presentation by MAS 2013-14

INTRODUCTION TO IMF CONDITIONALITY PACKAGE

Condition Imposed by IMF

Ending Subsidy on Gas and Electricity Increase in Tariff of electricity by 30 50% Floor on Net International Reserves Ceiling on budget deficit financing from the external sources, and it is also conditional upon the government PSDP spending on quarterly basis Increase the tax base and tax revenue Freezing of non-development expenditures Reduction in government internal debts

IMPACT OF IMF PACKAGE 2013 - GDP

Matter is not the IMF funding but the policy imposition Impact can be positive and negative as well as direct and indirect IMF conditions include changes in

Fiscal

Policy Monetary Policy Exchange rate policy

IMPACT OF IMF PACKAGE 2013 - GDP

Question! Whether implementation of IMF Package will help boost the economy or causes the real GDP to fall from the expected growth level? Recent Economic performance and situation

Average GDP is 3% over past five years Problems in electricity supply Difficult security situation Presence of loss making public sector enterprises Poor business climate Distorted trade regime

IMPACT OF IMF PACKAGE 2013 - GDP

As IMF document stated that growth rate without reforms will be 3%, while the government in the budget reported that growth rate would be around 3.4%. After the abovementioned reforms, IMF documents showed that growth rate would further drops to 2.5%, which is estimated to lead the unemployment of 1.2 million people according to industry experts. IMF predicted a growth of 5% in 2015-16 after the completion of the three year program. But the higher energy prices resulting from tariff increment, weaker security conditions, lack of investor confidence, depleted foreign reserves, higher debt burden, widening current account deficit, depreciating Pakistani currency, higher interest rates because of higher inflation, declining investment, and non-serious behavior of government regarding tax base enhancement is more likely to remain GDP growth subdued for the foreseeable period of time.

IMPACT OF IMF PACKAGE 2013 - INFLATION

IMF program stated condition to increase tariff by 30 50% The weight of electricity in CPI is around 4.4 hence we can expect the inflation directly increasing by tariff hike is around 2% Similarly the reduction in subsidy on Electricity and Gas will also cause inflation to increase Pakistans total foreign trade is around 33% of GDP, and increase in exchange rate will also put forward pressure on inflation The expectation of IMF regarding exchange rate around Rs.110 by 2015-16 seems a dream as the depleting foreign reserves and higher inflation are likely to depreciate currency exponentially

IMPACT OF IMF PACKAGE 2013 TAX SYSTEM

The program aims, first and foremost, at macroeconomic stabilizationthat is, bringing the budget deficit down and reversing the balance of payments problems. To ensure medium-term fiscal sustainability and create fiscal space for social and investment spending, it is important to raise the tax-toGDP ratio, including by broadening the tax base through a reduction in exemptions and concessions and extending taxation to areas currently not fully covered by the tax net. An overhaul of tax administration is also required, and provinces should contribute fully to the adjustment effort. The initial consolidation effort relied mainly on the revenue side given the chronically low tax revenue-to-GDP ratio. The government is taking a series of measures aimed at strengthening tax revenues by over 1 percent of GDP on an annualized basis.

IMPACT OF IMF PACKAGE 2013 TAX SYSTEM

The tax measures contained in the 2013 Finance Bill seek to increase revenues by 0.75 percent of GDP, and included: an increase in the GST rate; (ii) an increase in the corporate minimum tax rate; (iii) higher personal income tax rates for the top income brackets; (iv) higher excises on cigarettes; (v) increases in several withholding rates; (vi) introduction of several withholding rates; and (vii) imposition of new levy on movable assets. Moreover, by end-December 2013 we will implement a new gas levy that will increase tax revenue by 0.4 percent of GDP on an annualized basis. This package is a first step towards a more efficient and equitable tax system. Tax administration reforms will gradually deliver further improvements in revenue collections.

IMPACT OF IMF PACKAGE 2013 TAX SYSTEM

An initiative to incorporate three hundred thousand new taxpayers into the income tax net was launched in July. The 2013 Finance Bill granted the FBR access to bank information enhancing the scope and quality of information in its databases. The income tax initiative will be complemented with initiatives to enhance revenue administration for sales, excises and customs, to be developed and launched by end-December 2013 (structural benchmark). Beyond the current fiscal year, further revenue and expenditure measures will be implemented to achieve a sustainable deficit of around 3 percent of GDP by 2016/17.

IMPACT OF IMF PACKAGE 2013 INVESTMENT

Investment is majorly dependent upon interest rate and investor confidence In Pakistan there has been a lack of investor confidence mainly due to poor law and order conditions and inconsistent government policies IMF program 2013 is less likely to enhance investor confidence as higher inflation will curb consumption but on the other hand higher exchange rate may encourage exports however this relationship has not been significant in past years IMF suggested Pakistan to tighten monetary policy to curb inflation, but it will increase cost of borrowing and consequently will discourage investment Hence overall, there is no significant incentive to promote investment in IMF program 2013

IMPACT OF IMF PACKAGE 2013 PRIVATIZATION

Privatization According to IMF conditionality for loan sanction dollar 6.68 billion, Pakistan assured to privatize 65 public sector institutions (Ministry of Finance). What is privatization? Privatization is a process of transfer of ownership of property or business from a government to private entity. Why government need to Privatize PSEs? A statement quoted by minister of state privatization Khurram Dastagir Khan that the total annual losses and drain of public finances had touched Rs 500 billion. This is now the central point of economic policy and reforms. Government claims that new phase of privatization shall cover fiscal deficit. It will increase pure economic growth, development and employment.

IMPACT OF IMF PACKAGE 2013 PRIVATIZATION

Is the privatization beneficial? Government primitive role is to facilitate, regulating and monitoring the market and promote healthy competition. 1990, Pakistan sold off 167 state-owned enterprises at a price of approximately Rs 476 billion. The first phase of privatization in 19921996 included partial privatization of banks. The second phase of privatization (1997-2000) resulting in a complete denationalization of the banking sector. Previous privatization caused more unemployment and monopoly in the market. The sectors which were privatized totally transferred from government to some selected families. Private sectors banks perform better after privatization. India also took privatization measures its individual per capita income grow 4.5% in 1991. Up to 1991 the per capita income was hardly 1% per year.

IMPACT OF IMF PACKAGE 2013 EXCHANGE RATE

Pakistans currency is depreciating sharply and we have seen a significant free fall decline in recent months Pakistan is a country, where the fixed exchange rate policy is asserted to be pursued But the countries like Pakistan, the exchange rate is significantly dependent upon foreign exchange reserves and inflation The exchange rate of Pakistan has increased from Rs.18 to Rs.108 from 1988 to 2013, which accumulates a 500% increase over the period of 25 years Both the depleting foreign reserves and higher inflation will cause higher exchange rate in years to come Hence despite $6.6 billion from IMF and almost $15 billion loans from IMF and other global institutions in next three years, the widening current account deficit, increasing dependency on external loans, more dollar requirement for debt servicing, and lack of investor confidence, we expect that the exchange rate will keep on increasing with almost 10 15% per annum

IMPACT OF IMF PACKAGE 2013 BUDGET DEFICIT

The IMF program 2013 clearly stress upon the decline in budget deficit We can decrease budget deficit by lowering expenditures or by increasing revenues IMF has stressed Pakistan to increase its tax base to increase tax revenue and decreasing budget deficit Currently, the budget deficit is around 8.3% and the tax to GDP ratio is miserably just 8.5% The most crucial step of Pakistan can be the broadening of tax base, add agriculture income and tax evaders in tax net Until and unless Pakistan does not move to tax the high earners, agriculturists and tax evaders there will be no solution to this critical issue

IMPACT OF IMF PACKAGE 2013 MONETARY POLICY

As we have discussed earlier that due to the implementation of IMF program 2013 there are more chances of higher inflation IMF has also accepted that there may be higher inflation and Pakistan should use its monetary policy to deal with it Hence we can expect the tight monetary policy in years to come It will curb investment and there will be a downward pressure on GDP as well Pakistan should be careful this time as it is extremely necessary to identify the cause of the problem as well, with the problem itself The two policies, Fiscal and Monetary are clearly divergent considering the objectives of IMF We can not achieve higher GDP growth without investment, which has a close relationship with monetary policy

IMPACT OF IMF PACKAGE 2013 RESERVES

Pakistan has stepped forward to take loan from IMF with strict conditions because of its consistently depleting reserves Pakistans depleting reserves are majorly because of current account deficit and external loans repayments The higher growth rate of imports than that of the exports has led to higher current account deficit After the loan of $6.6 billion from IMF and overall $15 billion loan from different international organization including IMF and other countries in next three years are likely to improve reserves in short term but we expect that the medium term condition will be even worse Higher growth of imports than exports is likely to increase the current account deficit by $1 - $1.5 billion from previous year, despite the exponential increase in remittances in recent years Hence we expect that in 2015-16 Pakistan could not achieve the level of reserves to 3.5 months import bill

MEDIUM TERM OBJECTIVES OF THE IMF PACKAGE 2013

Raising growth gradually to near 5 percent by 2015/16 as macroeconomic stability is entrenched and structural reforms are pursued. Bringing inflation down to 6-7 percent range by 2015/16, from the current level of 8.3 percent. Increasing central bank reserves to over 3 months of imports by 2015/16. Reducing the fiscal deficit to

(a)3 percent of GDP by 2015/16 from an estimated 8.0 percent in 2012/13, with (b) provincial governments contributing their fair share of the fiscal consolidation process.

MEDIUM TERM OBJECTIVES OF THE IMF PACKAGE 2013 Liberalizing the trade regime Reforming public sector enterprises through restructuring and/or privatization. Improving the business climate. Strengthening the tax system. Protecting the most vulnerable from the direct and indirect impacts of reform measures.

WHERE WILL WE STAND AFTER IMF PACKAGE IN 2015-16?

Growth rate of exports from 2006 is around 7% Growth rate of imports from 2006 is around 11.5% Growth rate of remittances from 2006 is around 16% Keeping all the above rates the current account deficit is likely to increase by $1.5 billion from previous year Exchange rate from 1988 to 2013 has increased , from Rs.18 per dollar to Rs.108 per dollar, which shows an appreciation of 500% over the period of 25 years or annual growth of 7.43% In the foreign exchange market of countries like Pakistan, there is a close relation between Foreign exchange reserves and Inflation rate with exchange rates.

WHERE WILL WE STAND AFTER IMF PACKAGE IN 2015-16?

Our Projections 2012-13 2013-14 2014-15 2015-16

GDP Growth rate

GDP trillion Rs. Loan Disbursement bn. $ External Debt billion $

3%
24.46 66

3%
25.19 5 69

3%
25.95 5 72

3%
26.73 5 75

Domestic Debt tn. Rs.

Exchange rate External Debt trillion Rs. Total Debt trillion Rs. External loan repayment billion $ Reserves billion $ Debt to GDP Ratio

9.5
110 7.26 16.76

9.1
118 8.15 17.25

8.7
127 9.14 17.84

8.1
132 9.93 18.23

Current Account billion $ 3

3
3.035

3
3.080 7.885 68.75%

3
3.125 6.760 68.21%

10.000 68.52%

8.965 68.48%