Jahangir’s World Times (JWT): As the IMF programme is moving ahead, how do you see the performance of Pakistan’s economy in the first eighteen months of the programme?
Harald Finger (HF): Pakistan has made significant progress in the first 18 months of the IMF programme in addressing short-term imbalances and risks coming out of economic crisis of 2013. Tremendous progress has been made in strengthening the economy both in rebuilding of forex reserves and reduction in the fiscal deficit. However, it is too early to declare victory as a lot is still to be done. Now, it’s the time to focus on the gains we have made in the programme and on introducing economic reforms which are needed to further strengthen the economy.
JWT: During these months, IMF released money to Pakistan; Saudi Arabia also provided $1.5 billion and fuel prices also declined significantly. Then, what has been the performance of the economy indigenously?
HF: The facts that you have mentioned are, of course, very helpful. There has been a significant increase in government revenues since the beginning of the IMF programme. A major chunk of this revenue, as you mentioned, came from Saudi Arabia while the remaining part consists of borrowings on market terms. However, let’s not discount that the government has been able to regain access to the international markets which it was unable to in the beginning of the IMF programme in 2013.
JWT: The IMF has been laying much emphasis on restructuring and reforms. How do you see the reform process in different sectors of Pakistan’s economy?
HF: Basically we have four priorities. And, as we are moving to the next phase now, we want to tackle structural issues in the economy on these priority lines. One of these is related to the energy sector. Although, people have been given some relief from the nuisance of load-shedding, yet much is still needed to overcome this problem. Second is the issue of taxes because tax revenue is too low to finance the infrastructural and social needs of the country. Tax-to-GDP ratio is only 10-11 percent and it needs to be raised to more than 15-20 percent if Pakistan wants to survive in the emerging markets.
JWT: In case of Pakistan, tax reforms are always much talked about but broadening of the tax base has not just happened. How an ordinary Pakistani could say that the tax reform process in Pakistan is moving in the right direction?
HF: Reforms always take time. It’s not easy job or something that can be done overnight. Nevertheless, there has been progress; the tax-to-GDP ratio has increased significantly and we will be working with the authorities to further increase it. Improving the tax administration is a difficult task. Many countries have tried to do so and it has yielded varied results — some were more successful than others. Let us learn from the experiences of the most successful countries. A sustained effort to collect higher revenue ratio is more than inevitable now. Pakistan has made some progress but frankly a lot more is still needed.
JWT: What exactly is needed then?
HF: Pakistan direly needs to bring more people into the tax net. Tax administration also needs amelioration in order to execute the collection policies prudently and in a well-planned manner. Real estate and agriculture sector have a lot of potential of being taxed.
JWT: Some economists believe that IMF programme is to stabilize the economy only with fiscal deficit reduction. But, what about GDP growth in real terms?
HF: This year Pakistan’s GDP growth has been recorded at 4.1%. However, it has been due to a number of factors; for example, the strength of services and the construction sectors. On the other hand, some sectors have slowed down a bit like reduction in the private sector projects and in large-scale manufacturing. These sectors play a significant role in boosting a country’s economy. This means we should formulate expansionary fiscal policies. But the numbers reveal that public debt in Pakistan still exceeds 60% of the GDP while 40% of the federal spending has gone to the internal payments. We need to address real structural issues.
JWT: You say that we need to reform the energy sector. But circular debt has been a big problem in this sector. The government paid this debt with the IMF-provided money but it has again soared to more than 400 billion rupees. How government can rid Pakistan of it?
HF: Indeed the problems in energy sector are impeding Pakistan’s economic growth and there is an urgent need to address those at the earliest. Unfortunately, during the programme, circular debt started to accumulate again. However, the government is working with its developments partners like the World Bank group and the ADB. We, at the IMF, are also supporting its efforts.
JWT: Pakistan’s finance minister, Ishaq Dar, recently announced to increase the prices of electricity and gas. What percentage has been agreed with the IMF?
HF: We don’t agree on any specific electricity tariff, the regulator to that is the Government of Pakistan, and it is to decide the mechanism to reduce the tariff subsidy. We have agreed on some basic principles the policies on which were announced in the federal budget for FY2015-16. However, the poorest people will continue to benefit from the subsidized tariffs.
JWT: The public sector enterprises (PSEs), like Pakistan Railways, PIA, and Pakistan Steel Mills, have long been a liability on successive governments as they have been eating up huge finances of the country. IMF was also keen on their privatization. Where do we stand at present in this regard?
HF: The government, indeed, has ambitious plans for privatization and they have begun the process as well. But, as you said, some still remain to be privatized. I think the government is still trying to fix the PSEs through its restructuring plans. However, it is true that their privatization will put the onus of fixing them on the private sector.
JWT: Unemployment has been another major problem in Pakistan since long. How the dream of economic stability can be achieved unless people are provided with ample employment opportunities?
HF: I fully agree. We need to work on those sectors in economy which can generate jobs for the unemployed youth of Pakistan. During the first half of the IMF programme, Pakistan came out of the economic crisis. To start with, we aimed at achieving short-term economic stabilization and we have made significant progress in this regard. We can now focus more on reinforcing these gains which will surely lead to the availability of more and more jobs. This is ultimately what people need to improve their living standards.
JWT: Achieving macro stability in Pakistan is impossible without huge investments from abroad. But, Foreign Direct Investment (FDI) in Pakistan has dried up over the years. What plans on this sectors the Government of Pakistan has shared with you on this sector?
HF: You are absolutely right! Private investment in Pakistan, as I mentioned earlier, hovered around 10 percent of the GDP while in other emerging economies, it’s something around 20-30 percent. Government of Pakistan should now look for those areas where immediate progress can be made in removing the obstacles to growth and jobs creation. Pakistan has to raise the tax revenue if it wants to generate resources of investment in the infrastructure development.
JWT: While IMF programme is moving forward successfully, the China X factor has emerged with investments of around US$46 billion in Pakistan. How do you see this development?
HF: Frankly, it’s too early to assess the exact impact of the package on Pakistan because not all the details of the package are known to us. But, generally, any investment that Pakistan receives is highly welcome in this situation. Like I said it is sufficient investment in a country where foreign investment, over the years, have been extremely low.
As far as I understand, the plans include significant amount of investment in energy sector and also for infrastructure development.
JWT: How optimistic are you about the prospects of economic stability in Pakistan?
HF: Pakistan has made a significant progress over the first half of the IMF programme. In the area of stabilizing the economy, fiscal deficit has been brought down to around 4.9% of GDP this year. Forex reserves have again reached to nearly three months of imports. These are the sufficient gains. But, have we arrived at complete stabilization? The answer is NO! Still a lot of progress is to be made on reinforcing these gains. This is the only way to make Pakistan’s economy strong.