Prime Minister Imran Khan on Sunday met International Monetary Fund (IMF) Managing Director Christine Lagarde on the sidelines of the World Government Summit taking place in Dubai.
The prime minister tweeted that there was “a convergence of views” between him and Lagarde when it came to “the need to carry out deep structural reforms”.
He said that these reforms would “put the country on the path of sustainable development in which the most vulnerable segments of society are protected”.
A press release issued by the IMF said Lagarde’s meeting with the premier had been “good and constructive”.
The meeting was held to discuss conditionalities that have held up Pakistan’s accession to the Fund’s bailout programme.
“We discussed recent economic developments and prospects for Pakistan in the context of ongoing discussions toward an IMF-supported programme,” Lagarde was quoted as saying by the statement.
“I reiterated that the IMF stands ready to support Pakistan.”
The IMF chief said she highlighted during the conversation that Pakistan could “restore the resilience of its economy” through “decisive policies and a strong package of economic reforms”.
Citing the PTI government’s policy agenda, Lagarde said protecting the poor and strengthening governance were “key priorities to improve people’s living standards in a sustainable manner”.
“The technical staff-level contact through video-link is due this week and may be followed up by Finance Minister Asad Umar next week,” said a senior government official, adding the two sides might still meet at the staff level if needed, Dawn reported.
“A lot of work still needs to be done, but a final agreement should be in place by April and implementation start rolling in June,” said the official, adding that all policy actions would revolve around the next year budget. “We have reached broad understanding and will stay engaged.”
Sources said the revenue collection target for the next fiscal year would be worked out by the IMF and it could be well above Rs4.7 trillion, compared to about Rs4.39tr this year fixed by the government. More upward adjustments in central bank’s policy rate and exchange rate depreciation would be part of the understanding, they said.
Further adjustments in energy prices, expansion in revenues, reduction in losses of public sector entities, further autonomy to the State Bank of Pakistan, market-based currency exchange rate and deep-rooted structural reforms are key areas under the future assistance package from the IMF. The two sides had already agreed on the way forward but had differences over the sequencing as the government wanted the passing of ‘further pain’ on to people next year.
A statement released by the Ministry of Finance on Twitter said deliberations between Pakistani authorities and IMF staff will continue “to finalise an agreement on the contours of a programme”.
The ministry said that the premier “appreciated IMF’s support to Pakistan and shared his vision for nation-building”.
Prime Minister Khan also expressed the government’s commitment to undertake structural and governance reforms and to strengthen social protection in the country, the statement added.
It also said that the IMF managing director recognised the steps taken so far by the government to bring stability to the economy. She expressed the Fund’s desire to remain engaged with Pakistan in ensuring that economic recovery is sustained.
Earlier, Information Minister Fawad Chaudhry had said the Khan-Lagarde meeting would “give us a chance to understand the IMF views and we will be able to give our version to [the] IMF chief”, Radio Pakistan reported. Chaudhry stated that Pakistan wants “a fair deal that can actually help Pakistan in the short-term without affecting our long-term economic goals”.
Meanwhile, Foreign Minister Shah Mehmood Qureshi stressed that Islamabad wanted to proceed with the bailout package under conditions that would not put an unjustified burden on the common man.
Stumbling issue in IMF bailout talks
The IMF is asking for an adjustment of around Rs1,600-2,000 billion over three to four years. It also wants some corrective measures to put Pakistan’s economy on the right track after witnessing the highest-ever current account deficit.
But the stumbling issue in the talks is the pace of adjustments in the current expenditure. The emphasis on current expenditures comes as a result of a focus on what is known as a ‘primary balance’ in the parlance of public finance.
A senior official involved in the negotiations earlier told Dawn, there is some space for a cut in certain expenditures where Pakistan is in a comfortable position. “This agreement in cut will pave way for accession to the programme,” the official claimed, adding it will be a politically difficult decision.
A cut in the current expenditures still seems to put the government in an awkward position by making adjustments in subsidies and other special grants.
The IMF has been demanding that the burden of any expenditure cuts should fall on current expenditures that include debt service, defence, and subsidies. Previous governments decreased development expenditures when undertaking the Fund’s adjustment and usually left current expenditures alone (other than subsidies).
But the official had said there is certain non-development spending which cannot be discontinued or reduced.
The primary balance of a government’s budget is the difference between revenues and expenditures after removing interest payments. It tests whether the path of debt accumulation of any country is sustainable or not.
If this is in deficit then it means that at least some of the interest payments due in the given year will have to be made through borrowing.
Cutting the primary deficit requires a cut in current expenditures, and usually becomes necessary when reducing debt-to-GDP ratio is a priority.
Finance Division’s Spokesperson Dr Khaqan Najeeb had told Dawn that productive dialogue continues with IMF on all areas including fiscal, energy, structural reforms and monetary policy. Discussions are part of regular ongoing interaction between government and IMF and will continue in coming weeks as well, he had said, adding that “technical level subject-specific discussions also support the process of overall dialogue”.
According to Najeeb, the government has already taken several policy measures including an increase in interest rate, gas and electricity tariffs along with revenue measures.
The Ministry of Finance recently announced that the Federal Board of Revenue’s (FBR) target would not be revised downward following a revenue shortfall of Rs191bn in the first seven months.
The FBR has been asked to take administrative measures including revival of tax on mobile phone cards to cover up the shortfall in reaching the budgetary target.
The Fund has also asked for further monetary tightening as well as a complete free float of the exchange rate.
“We are already moving towards the target in these areas,” the official had said, adding the IMF has acknowledged these measures.
According to the official, the finance minister has already conveyed to the IMF during recent parleys that only those measures will be taken which are favourable for the country’s economic growth.
Although the government has secured breathing space through Saudi Arabian and United Arab Emirates loans, an IMF programme is essential to unlocking access to resources from other multilateral lenders like the World Bank and the Asian Development Bank, as well as global capital markets.
(This news/article originally appeared in DAWN on February 11th, 2019)