IMF asks Pakistan to stop SBP intervention

[Naveed Yaseen]

By Mehtab Haider
ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to adopt a market-based approach in exchange rate policy by stopping intervention of the State Bank of Pakistan (SBP), curtail fiscal deficit and increase tax-to-GDP ratio up to 15 per cent, the IMF’s Director of Middle East and Central Asia Development, Masood Ahmed said on Tuesday.

In an exclusive chat with The News after attending a seminar jointly organised by the Pakistan Institute of Development Economics and IMF here, Masood Ahmed said that Pakistan’s oil import bill decreased by $1.3 billion per annum after a fall of $10 per barrel in prices of crude oil in the international market. “It will help reduce the financing gap in the current fiscal, which was earlier estimated by the IMF at $4.5 billion,” he added.

He did not rule out the possibility of revising downward the FBR’s tax collection target of Rs1,360 billion due to the changing scenario in the wake of a massive fall in crude oil prices in the international market. “Yes, a substantial revenue is generated at the import stage and fallout for revenue collection can be discussed with Pakistani authorities,” he added.

He said Pakistan could jack up its fiscal deficit target to 4.7 per cent from 4.2 per cent if it was able to generate additional $2 billion from donors.

On flexible exchange rate, he said it should reflect macroeconomic indicators by adopting a market-based approach depending upon the demand of the rupee against the dollar in the market. The IMF viewed that efforts should be made to avoid keeping the rupee artificially strong, he maintained.

To another query about possible sectors which can be brought into the tax net, he said that there are a lot of sectors and it depends on the government how it moves to bring new taxpayers into the tax net. “Around one per cent population in the whole country is under the tax net and there is a lot of potential, which can be tapped to increase the tax to GDP ratio from 10 per cent to 15 per cent,” he added.

When Ahmed was asked about GDP growth’s projection of 3.5 per cent for the current fiscal mainly relying upon the performance of the agriculture sector, he conceded that the GDP growth target depends upon the performance of agriculture and exports sectors of the economy.

Earlier, in his address during the seminar, the Fund’s Director Middle East and Eastern Department said that it was the projection of the IMF that the real GDP growth would remain zero after 1940 in developed countries like USA, UK, Japan, Germany and others during 2009 owing to severe financial crisis witnessed by the economies after September 2008.

The GDP growth of China would be cut down from 9.5 per cent to below 5 per cent, he said.

He said that there might be some economic recovery by 2010 but it mainly depends upon US treasury market. “There is a need of $1.2 trillion stimulus to avoid recession in the economies,” he maintained. Citing an example, he said the oil producing countries estimated a surplus by $450 billion but now they expected only a $4 billion surplus after the financial crisis that resulted in a steep decline in the prices of crude oil from $140 per barrel to $40 per barrel.

On this occasion, Juan Carlos Di Tata Deputy Director, Middle East & Central Asian Development of the IMF said the tightening of monetary policy was inevitable to achieve macroeconomic stability in Pakistan. The fiscal deficit target will be brought down from 7.4 per cent of the GDP to 4.2 per cent of the GDP in 2008-09 and further lowered down to 3.3 per cent by 2009-2010, he observed.

To achieve the fiscal deficit target, he said, Pakistan would focus more on enhancing tax to GDP ratio which is quite low compared to other regional states. He said that the expenditures on social safety nets would be increased from 0.3 per cent of the GDP to 0.9 per cent of the GDP in the current fiscal year. The Government of Pakistan agreed to eliminate borrowing from the central and continuation of tightening monetary policy.

“We have estimated that the finance gap will be hovering around $4.5 billion for the current fiscal which will further come down to $3.5 billion by 2009-2010,” he added.

Talking about projected Current Account Deficit (CAD), he said that there might be some need of adjustments owing to weaker remittances mainly from the Gulf and USA, lower exports and foreign direct investment, which would offset substantial reduction in prices of crude oil in international market.


http://www.thenews.com.pk/daily_detail.asp?id=152226