IMF says carbon tax was Pakistan's own decision

[Naveed Yaseen]

By Mehtab Haider
ISLAMABAD: Paul Ross, the resident chief of the International Monetary Fund (IMF) in Pakistan, said on Monday that the imposition of fixed carbon surcharge on petroleum products was the choice of the government to generate revenues and the IMF did not impose it as a condition under the standby arrangement (SBA).

Talking to a selected group of journalists at a seminar organised by the NUST Business School (NBS) on global financial crisis and role of the IMF, he said the Fund would pursue Pakistan’s tax authorities to move towards the Value Added Tax (VAT) mode from thefiscal year 2010-11.

He confirmed Pakistan and IMF authorities would hold talks by early July in Dubai to review the steps taken by the government in the budget 2009-10. However, he appeared reluctant to reply questions pertaining to the budget, especially on government’s efforts to broaden the tax base.

Earlier, addressing the seminar, Paul Ross said IMF’s programme was successful because it encouraged Islamabad’s development partners to make over $5 billion pledges during the Tokyo’s conference.

“Pakistan’s economy is facing challenges in terms of materialising $2 billion pledges made by the Friends of Democratic Pakistan (FoDP) during the Tokyo’s conference for the fiscal year 2009-10,” he added.

About Islamabad’s request for an additional $4 billion standby facility in case of delayed funding of $2 billion from the FoDP in 2009-10, he said the executive board of the IMF would take a final decision in this regard.

“The key challenge for Pakistan is to reduce vulnerability to external shocks, which increased manifold owing to low revenue generation,” he said, adding that the lowest tax to GDP ratio in the range of nine per cent also resulted into shrinking the cushion for spending on development projects, especially for social sectors.

Paul Ross said Pakistan had requested for loan from the IMF in November 2008 under the 23-month standby arrangement (SBA) programme after witnessing macroeconomic stability in last few years because fuel and food shocks created fiscal imbalances. “This situation hiked the fiscal deficit in 2007-08 after which the government borrowed from the State Bank of Pakistan, which spiked the inflationary pressure.”

The IMF programme, he said, helped Islamabad build its foreign currency reserves, achieve stable exchange rate, control fiscal and external deficits and enhance the government’s ability to generate resources through treasury bills.

He said Pakistan’s exports and remittances could face the negative impact of the global financial crisis. “The capital inflows such as the FDI are also going to face the negative impact,” Ross added.

The IMF programme, he said, was focusing upon bringing reforms on the taxation side where they would move towards the VAT mode. He said there was a dire need to spend money on the social sector, especially health and education, but it required revenue generation as only one per cent population was paying their due taxes. “The tax to the GDP ratio is standing at the lowest nine per cent and there is a need to broaden the tax base,” he added.

About discount rates, he said the discount rate was reviewed on the basis of reduction in inflationary pressure. Last time, the IMF allowed reducing the discount rate because it thought there was space available. He said Pakistan required stabilisation because investment could not be attracted by an economy where there was no macroeconomic stability.

“The IMF policies are not anti-growth as Pakistan achieved two per cent GDP growth in the outgoing fiscal year while remaining under the IMF programme,” he said.
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ZULFIQAR AHMAD
ISLAMABAD (June 23 2009): The imposition of fixed carbon surcharge on petroleum products was Pakistan's own decision to generate revenue and the International Monetary Fund (IMF) had no such conditionality attached to its multi-tranche assistance. Resident chief of the Fund in Pakistan, Paul Ross stated this on Monday, while talking to journalists after a seminar organised by Nust Business School (NBS) on global financial crisis and the role of IMF.

"The IMF did not ask Pakistan to impose fixed carbon surcharge on petroleum products. It was its own choice through which it wants to ensure revenue generation," Ross added. He said the IMF would pursue Pakistan's tax authorities to move towards value added tax (VAT) mode from 2010-11. He also confirmed that Pakistan and the IMF authorities will hold talks next month in Dubai to review the steps taken by the government in budget 2009-10. However, he showed reluctance to talk about the measures taken by the government to broaden the tax base in the outgoing fiscal year.

He was all praise for IMF programme in Pakistan, saying that it encouraged its development partners to make over $5 billion pledges during the Tokyo moot. Pakistan's economy is facing challenges and needs injection of $2 billion pledged by the Friends of Democratic Pakistan (FODP) in Tokyo for 2009-10, he added.

Commenting on Pakistan's request for additional $4 billion standby arrangement in case of delay in materialising funds from the FODP, he said, the executive board of the IMF is final authority to take a decision. The key challenges for Pakistan, he said, are to reduce vulnerability to external shocks, which increased manifold due to low revenue generation.

"The lowest tax to GDP ratio in the range of 9 percent also resulted in shrinking the liquidity for spending on development projects especially for social sector uplift projects," he added. He said that Pakistan applied for the IMF loan in November 2008 under 23 months standby arrangement programme after witnessing macroeconomic instability in last few years because the fuel and food shocks created fiscal imbalances. This swelled the fiscal deficit in 2007-08 after which the government had to borrow from the State Bank of Pakistan, which spiked inflationary pressure, he added.

The change of government also affected the foreign exchange reserves which started depleting along with the rupee depreciation, he said, adding that the government took a lot of time seeking funds from other external sources before formally joining the IMF programme as a last resort.

He said the IMF programme helped Pakistan in building foreign currency reserves, achieving stable exchange rate, controlling fiscal and external deficits along with enhancing the government's ability to generate resources through floating different kinds of T-bills. He said the IMF programme is focused on reforming the tax machinery, moving towards VAT mode.

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