Pakistan to cut growth rate to get IMF tranche

[Naveed Yaseen]

By Khalid Mustafa
ISLAMABAD: Pakistan and the IMF are close to an agreement to bring down the GDP growth target to less than 2.5 per cent for the current financial year in talks currently being held in Dubai for the next IMF tranche, a senior official said on Sunday.

Previously, the IMF had agreed to 3.4 percent GDP target to provide the $7.6 billion bailout package, the official, who is part of the ongoing talks, told The News. “Pakistan would also seek the permission of the IMF to decrease the discount rate so that economic activities in the country could begin. The objective of the tight monetary policy has already been achieved in the wake of the collapse of oil and food commodity prices due to which the import bill has entered the negative zone.”

The government had increased the discount rate by 2 percent as prior condition before moving the IMF for the bailout package. “However, the IMF does not seem to be giving relief to Pakistan on this particular issue as it always religiously pursues a tight monetary policy,” said the official.

Adviser to Prime Minister on Finance Shaukat Tarin, when contacted by this scribe on Sunday, revealed: “The IMF is saying that the revised GDP target should be between 2.5 percent to 3 percent. But we are seeking† justifications from the Fund during talks as the State Bank of Pakistan is of the view that Pakistan would achieve a 3.4 percent GDP target.”

Tarin said: “The budget deficit target of 4.2 percent will remain unchanged. “However, independent economic expert Saquib Sherani is of the view that the GDP growth would tumble to less than 3 percent,” the adviser disclosed.

When asked whether the government will seek permission from the IMF for decreasing the discount rates, he said the IMF had nothing to do with it as this was entirely up to the government to decide. “We are considering decreasing the discount rates but it may take one or two months as we need to generate industrial activity in the country,” he said.

The Pakistan team, headed by Dr Waqar Masud, Secretary Finance, is negotiating with the International Monetary Fund (IMF) for downward revision of targets of the GDP, the current account deficit (CAD), tax revenue, exports and imports under the new economic outlook of the world, which has entirely changed now since the IMF loan was negotiated in October 2008.

The crude oil price in September stood at $100 per barrel, which has now tumbled to less than $40 per barrel. Palm oil price in September 2008 stood at $1,300 per ton, which has nose-dived to $450 per ton. Likewise, the prices of food commodities have also sharply gone down.

In the wake of the economic meltdown in the US, the whole world entered into the worst-ever recession that also adversely affected Pakistan’ economic outlook. Under the new economic scenario, the IMF and Pakistan are renegotiating all the targets set earlier under the $7.6 billion Stand By Arrangement (SBA) loan.

“Mr Ahmad Waqar, Chairman of FBR, has also reached Dubai to help revise the tax revenue target to somewhere between Rs 1,250 billion to Rs 1,300 billion from Rs 1,360 billion earlier agreed.”

The FBR collects 42 per cent of tax revenue from imports, which have now declined to the negative zone as under the new scenario, the imports are projected to be at minus 6 percent by the end of the current fiscal.

During the ongoing talks held so far, both sides are also close to agreeing on growth between negative 6 to 8 percent in exports from the earlier positive 12 per cent figure. Similarly, both sides have almost agreed to import growth target of negative 8 to 10 percent from the earlier agreed positive 1.1 percent growth for the ongoing financial year.

“The new target of the current account deficit (CAD) will be revised down to 6 percent of the GDP, which was earlier at 6.5 percent,” the official from Dubai indicated. However, the budget deficit target of 4.2 per cent will remain the same, which will be bridged by collecting the non-tax revenue as the tax revenue target of Rs 1,360 billion will not be met.

The government will continue to collect non-tax revenue through petroleum development levy on POL products in the months to come. It means that the government will not reduce the POL product prices unless and until the fiscal deficit target is met. The government will now collect revenue from POL products as carbon tax.

In the remaining talks, the official said the next budget outlay would be finalised under the action plan for tax system and tax administration reforms will be discussed. The next budget for 2009-10 will be prepared in the background of the agreed action plan, which will include broadening of the tax base, elimination of exemptions and administrative reforms that include merger of the General Sales Tax (GST), the Income Tax (IT) and the Central Excise Duty (CED) under the Internal Revenue Services.

The Medium Term Microeconomic Framework, the official said, was earlier finalised in October 2008 by both Pakistan and the IMF, keeping in view the information gathered up to September 2008 but now the global economic outlook had entirely changed.

http://www.thenews.com.pk/top_story_detail.asp?Id=20505