OREANDA-NEWS. October 12, 2015.

Harald Finger, Mission Chief, IMF
Wafa Amr, Senior Communications Officer, IMF

MS. AMR: Thank you. Good morning. Good afternoon to all colleagues who are joining us from Pakistan. Mission Chief Harald Finger will make a small presentation then we will take questions. I would like to remind everybody that the documents and the conference call content are all embargoed until 9:30 Washington time. It's unfortunate that the embargo was broken by a newspaper. I would just like to tell everyone that we take this very seriously and we will take action.

MR. FINGER: Yes. Good afternoon, everybody. Last week as you know on September 28 the Executive Board of the IMF completed the Eighth Review of Pakistan's Economic performance under the three year EFF arrangement. This led to the disbursement of 360 million SDRs, which is about US\\$505 million, bringing total disbursements under the program to about US\\$4.5 billion. As you've seen in the report which was circulated to you under embargo, economic growth has been gradually strengthening and the outlook is for further gradual increase, although let me stress that at about 4.5 percent this year growth still remains insufficient to absorb the growing number of new entrants into the labor market.

Performance under the program has been broadly positive, so with some slippages, two performance criteria, and three indicative targets were missed. Despite these slippages the program has remained on track and we will meet the authorities later this month in the context of the combined Ninth Review and Article IV Consultation to discuss performance through September and next steps in terms of the policy agenda.

Now looking ahead it will be important to stay the course on the goal of gradually reducing the fiscal deficit, to address the still high level of debt, to reduce the government's high financing needs which do absorb a significant share of banks lending capacity at the moment, and also over time to free scarce budgetary resources that can then be employed more for higher priority uses. For instance, infrastructure, health, or education.

It will also be important to continue with the strong efforts to address the power outages and circular debt. Problems in the power sector are key in our view, a key constraint in our view to economic growth. And also source of significant contingent liabilities for the government. And in addition to power sector reforms let me mention a few others, measures to broaden the tech base, to generate more revenue for priority expenditure, and further progress in restructuring or privatization of ailing public sector enterprises. And also in business climate reforms will be needed to raise growth and enable private sector job creation.

But let me stop here and address your questions. Thank you.

MS. AMR: Thank you, Harald. For colleagues asking questions could you please identify yourself and the organization you work for.

Questioner: Hello, Mr. Finger, Shahbaz Rana from the Express Tribune. I was just going through your report and I found a couple of interesting points. One issue is that you have mentioned that Pakistan is well positioned to achieve this fiscal year's budget deficit target of 4.3 percent of GDP. But at the same time you have mentioned that there might be some slippages of 0.3 percent which the government of Pakistan has assured could cover by making some product expenditures, by diverting expenditures from the grant side. But I don't think there is any space available. Do you think that the grant expenditure allows the government to divert these expenditures, and don't you think it was the right time to review the budget deficit target instead of missing it by the end of the year?

MR. FINGER: Indeed we discussed the mission and as is stated in the report our view was that there was a small gap on the revenue side and the government committed to make sure that this all is possible within the existing envelope of deficit of 4.3 percent. That is the current status of our thinking. Of course we will as I mentioned review the program in the context of the September target at the end of this month when we meet the authorities and then we can discuss the policy agenda going forward.

INTERRUPTION

MR. HARALD: Apologies for the technical glitch here. What I was saying is that as you noticed in the report we did see a small gap in the fiscal accounts going forward in our assessment, which the authorities told us they would be able to absorb within the existing envelope of the 4.3 percent deficit. That is the current status. We will of course review the program in the context of the upcoming REO discussions when we meet later this month in the context of performance through September and that will of course be a moment where one can review policies going forward in a more comprehensive way.

QUESTIONER: I just want to ask that there is a lot of confusion in Pakistan after the completion of the Eight Review, during the process of completion that the IMF is probing the budget deficit number of the last financial year. Because some economists have really raised some very, very important issues and IMF is probing it. Would you confirm it that you probe anything regarding the last budget deficit target? What was the IMF's actual position?

Thank you very much.

MR. FINGER: As you noted in the report we have indeed revised the budget deficit numbers as part of our routine and ongoing discussions that we are having with the government always. In September we agreed that some external loans that are classified outside of the public sector development program should be included actually in the overall budget deficit for the purposes of the IMF-supported program. And this implied as we note in the text an upward revision of the budget deficit for program purposes by 0.1 percent of GDP to 5.4 percent of GDP in 2014-15. And also revisions by similar amounts for past years. Now these revisions do not significantly change the state of Pakistan's fiscal position and they also do not alter the thrust of the program. And let me just stress that this data revision has been part of ongoing joint efforts to improve the data quality in Pakistan.

Now as to the broader debate of what is the deficit number and is it much, much larger than what we report, maybe let me just make a few points here. One key point is that we're measuring it from the financing side so what the government borrows and what it has in its bank account, that determines the deficit. Then the second way to do it, which is what economists call doing it from the above line, which is by looking at the systems that Pakistan has in place for measuring revenue and expenditure and determining it that way. For program purposes we are following, and have been following, and that is a practice, that is done in many, many Fund programs, is measure it from what is called below the line, looking at the financing items and the composition of that. And that is usually more reliable of the two ways to measure it.

The other point that I want to make and stress is that we are following -- consistently we have been following what we call the general government, which means that it's the federal government in the provinces. That is the definition of the entities that we look at to determine the deficit. It does not include the state-owned enterprises so you will not see included here any deficit, any losses that public enterprises make including circular debt in the discourse. That is not reflected in the deficit here. But that is something we've consistently been doing and this is done again in the majority of IMF programs, largely for reasons of data availability and having quickly a comprehensive view of the deficit that we have to monitor quite quickly after the end of each period.

The final point on that maybe is that on the privatization receipts, since the central bank is also not included in the general government, any companies that the central bank sells, like including these banks that were on the books of the central bank, they were in the accounting calls a profit because the sales prices was higher than what they paid many years ago when they first took them on their books. That profit then enters through the accounting, it becomes part of the central bank profit, and part of the base that then gets transferred to the federal government as a non-tax revenue. This is different from novel privatization where an entity owned by the provisional government gets sold, and that will be counted as a financing item which would then be below the line. And again let me stress this is something we've been consistently doing throughout the whole program that we have now, and even going back to the privatizations of banks that were also on the books of the central bank in the early 2000s. Those were all treated in the same and similar way so there's no playing and no inconsistencies in the numbers here.

QUESTIONER:I have a follow up question. On the same issue, what is this -- it appears 178 billion statistical discrepancy that you have also mentioned in your report?

MR. FINGER: The discrepancy arises because as I mentioned you have two methods of deriving the deficit. One is you look at bank accounts and financing items, and the other one is to look at the systems that the government has in place to record revenue and expenditure. And those systems they do not always arrive at the same number. Since they're formed from different systems they will have a difference in the number. That is always the case. In all Fund programs you do find some statistical discrepancy. We noted that in 2014-15 the discrepancy increased relative to previous years and we had some discussions around that topic to see what is possible to do. But let me stress that in a historical context there have been years where the discrepancy was much larger than this, so it's not out of the norm to see a discrepancy this size.

QUESTIONER: I have two questions. First I would like to know whether the government and -- finance minister and government has shared the proposed package for the textile sector with the Fund.

And the second is are you satisfied with reforming of NAPRA Es you have been pointing out in many of you previous reviews?

MR. FINGER: Thank you very much. I'm not quite sure, are you talking about the package for farmers maybe? Or for the textile sector?

QUESTIONER: Oh, no, no. I'm talking about the package for the textile sector which is under discussion.

MR. FINGER: That is something that we will take up when we meet the next time at the end of this month in Dubai with the authorities. Like with the farmers, let me stress that given the difficult outlook and difficult recent history already in commodity prices there is a need of course to look and see what needs to be done to help those groups that are very adversely affected by it and not all of them are well protected, including rural farmers in the context of the farmer's package. So that is something that is close to our heart. Of course it needs to fit into the overall picture and the overall fiscal strategy, and these things are what we discuss with the authorities.

On the electricity sector, we took note of the audit report that showed large scale fraud in the power sector. This is something that we need also to discuss in the context of the upcoming review. We think it's very important to make sure that governance is adequate in the sector and that we'll be able to gradually improve collections and greatly reduce the losses and the theft, and over time bring the sector to cost recovery which is quite important to bring and to stream the idle capacity that is now there. And that together with new supply that is going to come on stream over the next few years, then that will hopefully reduce quickly the amount of blackouts that we have now in the system and that is holding back -- well, it's an inconvenience for consumers, so holding back growth, and together with the circular debt is a drain on public finances.

QUESTIONER: My question is about privatization program. It seems that the program seems to have stalled in first few months of this fiscal year. Is the IMF concerned about it? And among -- with this planned privatization, which is the most important one on the list and why?

MR. FINGER: Thank you. Yes, the progress of privatization has had some delays in it. Initially the government, they had nothing right and so wanted to set the tone for privatizations and create an atmosphere for it by doing transactions that were basically on the capital market side and were relatively easy to undertake. Now the more difficult ones are coming up and the government has found out that in practice these are more difficult than they had hoped that might be the case. Let me stress that this is the case of many, many countries; that privatizations end up being much more difficult and much more time consuming that initially hoped for, but we do think it's quite important to see this through, particularly to those companies that are a drain on public finances and are not in good shape at the moment, including -- I would -- let me mention Pakistan Airlines. Also the steel mill would be good to see progress there to reduce the further drain on public finances. Also on the railways, which is not on the list of privatizations but is being restructured. I think it's quite important to continue making progress. They've already made some progress there, but I think it's going to be important to continue making the progress.

In addition to that, in the power sector the distribution companies that are put up for privatization -- this is going to be quite important to improve the efficiency and also to reduce the circular debt in the energy sector, so those are also quite important. But let me also stress that the government has now made good progress on the privatization of for example the national power construction company or NPCC. And so that is something that we take note of and that we think is good progress as we go ahead with this.

QUESTIONER: A little comment on Pakistan shared total side of circular debt and what the strategy they are going to abolish it?

MR. FINGER: Thank you very, very much. Yes, the government is sharing talk of circular debt. All the details are in the document. Circular debt is now about two percent of GDP when including the debt that is sitting in the holding company. The strategy to eliminate the circular debt has been agreed together with development partners that are active in the energy sector. So between the government and the World Bank and the Asian Development Bank, together with us as well -- and we have an indicative target under the program on the new flow of arrears in the energy sector of the flow of circular as it is commonly called. The goal is to reduce it over time, over the next three years, to a much more manageable level, and as I mentioned at the same time to address the stock of circular debt that is sitting there by privatizing the distribution companies.

All the details are in the report and we are happy to give you more information on it naturally, or in this call if you want.

QUESTIONER: I have a couple of questions, both follow ups. What's the Fund's assessment of the two companies that you mentioned, PIA and the steel mill? Does the Fund think that the government will be able to achieve these privatizations in this fiscal year

And my second question is, is the Fund satisfied in general with the quality of data that's being provided by the government of Pakistan? Because there have been some objections raised by economists and in some publications like the FT, that perhaps the government isn't providing a clear picture to the Fund during these reviews.

MR. FINGER: Thank you very much. Starting with the question on the privatization, we did discuss this with the government. Their plan is to issue expressions of interest for PAA -- to facilitate expressions of interest for PAA before the end of this calendar year, so by end of 2015, and to privatize it by the end of this fiscal year in June 2016.

As for the steel mill, the plan is to complete privatization by March. Now these plans as I mentioned there is, of course, a possibility that things take a bit longer in the process. It is not uncommon in many, many countries. These privatizations take a bit longer than initially hoped for. But I think the important part is that the government is pursuing this and wants to privatize these and soon. I think that’s a good development.

On your second question, we’re certainly aware of these allegations and I did in an earlier question point out how we see, for example, the fiscal deficit and how it’s measured. We did revise it slightly, this mission, as we’ve continued to improve the data quality.

So more broadly let me say that there’s, of course, certainly room for improvement in statistics from Pakistan. There’s no question around it, but also we do not have any evidence of intentional wrongdoing on the side of the authorities. The efforts to improve the data quality are ongoing and should, of course, continue. And let me also stress that we are providing technical assistance in that context to Pakistan.

QUESTIONER: The report said IMF has related some concerns on the taxation system and the IMF has suggest some tax reforms to the government. Would you share these reforms, these tax reforms, that you suggest to the government?

MR. FINGER: On tax reforms, I think it’s quite important -- that the most important part is that we need to increase the revenue ratio by broadening the tax base. So not by increasing further the burden on particular companies that already have paid tax, but by bringing more people into the tax base who are now exempt or are evading it. The government has already done a lot on that front. They’re brought in 190,000 new personal income tax files into the net, for example, since the beginning of the program in mid-2013. They’re also continuing their efforts to increase the coverage of the retail sector and GST collection and there’s detail on that in the report in the Memorandum of Economic and Financial Policies. And they’re also increasing and have already increased by a good amount the number of tax audits and allotting tax assessment.

Another point that I think is critical is the passage of the legislation that now strictly limits the authorization for administrative tax exemptions and concessions. Those now can only be temporary and only applicable in a number of exceptional circumstances through the administration on the side of the cabinet. And beyond it any other exemptions now need to be given by parliament, which I think is the right strategy.

But, of course, you know there’s significant potential for further gains from this area. The tax duty free ratio, Pakistan is spending 11 percent in emerging markets and more advanced countries see much higher rates maybe in the range of 15 percent and some countries well above 20 percent. So it shows that there is still significant potential for further gains. The number of personal income tax filers, despite the progress, still is just above 900,000 out of, for example, 3.6 million registered taxpayers in a population of 190 million. So that shows you the extent of possible increase. And I could give you similar numbers for corporate income tax and retailers for GST.

So there’s a lot of potential for further improvement.

QUESTIONER: Hi there. I’d just like to follow up on your question, please. You said that there’s 190,000 new tax filers. How many of these people are actually paying significant amounts of tax? Are people just registering and paying 200 or 300 rupees because we’re hearing a lot about that?

MR. FINGER: Yes, there’s, of course, the issue that how much you actually gain by bringing these people in. I think the important part is to widen the tax net and bring more people in. The actual amount that you can collect from it, of course, varies and depends on who files and what their tax obligation is.

So I think it’s important in addition to these efforts to continue with ways to bring in other taxpayers and individuals that will give you pay or at least say the average of what you could expect for a taxpayer. I think the policies are active, that require government suppliers to be in the current loop of active taxpayers for people who want to continue to do business with the government will help. Similarly, the integration of the national tax system with a computerized national identity card database is also going to help by giving the tax administration a better base of information to develop an audit strategy and an enforcement strategy.

More broadly I think loose-based auditing will help also and they’re in the process of doing that. In addition to that, I think an important measure going forward will be the legislation against (inaudible) transactions, which are now commonly used to evade taxes. These measures together with a number of others I think will overtime bring an increased amount of tax collection through these tax administrative measures.

QUESTIONER: I want to ask the State Bank of Pakistan has essentially said that floating of the euro bonds that have been essentially put are part of IMF program. My question is why has the IMF really forced Pakistan to float 500 million euro bonds and how do you see the timing and what is the justification of 8.25 percent?

My other question is that most of the economic experts are now claiming that the IMF reports are political. Do you think they are really political and what reforms that Pakistan will have in this program?

MR. FINGER: Thank you. On the first question we do have, of course, a financing plan that includes foreign financing, including euro bonds and so on. But there’s an adjuster in the program, so it’s not a Fund requirement to go ahead with the euro bonds at any particular time, particularly when markets aren’t good, but let me stress there’s a positive. The government was able to place the desired amount even under the more adverse market conditions. Postponing the issue would have also meant to take a view as to whether and when markets would improve, and there’s currently no clear expectation that markets will ease in the near term.

On the second question, we, of course, are an economic organization. We’re focused on the economics to put in place and help the government to see through a program of putting in place policies that do two things: One is to strengthen the resiliency of the economy by reducing the fiscal imbalances and bringing reserves back up; and secondly to then find policies that overtime will allow for higher and more sustainable rates of growth and ultimately job creation, which is what matters I think most for the average Pakistani people.

And so these things are ongoing. I would say there has been good progress on the stabilization front. The fiscal deficit was already reduced by quite a bit to 5.4 percent of GDP in the last fiscal year and further. Progress is underway for this year. Foreign exchange reserves, which had become precarious by the middle of 2013, have now been rebuilt to the order of a coverage of more than three months of imports, still at a level where it’s a bit low, but already a much more comfortable situation than we were in 2013.

Reforms to strengthen growth are, of course, ongoing and some of these reforms are taking longer than initially hoped. But again let me stress that this is the case in many, many countries under IMF programs that reforms tend to be a lot of optimism in the beginning and planning for a quick reform implementation. And as one goes along and finds out about the complexities that we actually entail, often these take a bit longer. And so they are underway. Of course, more progress is needed to raise the growth rate in Pakistan. We hope that with good and ambitious will and follow through, we will be able to keep improving Pakistan’s economy.

QUESTIONER: There is a general perception that the IMF program is anti-poor and pro-government, every support service, power and gas tariff, have increased and jobs and employment in shape of privatization, which radically affect the poor segment of the country. What is your take on this?

MR. FINGER: Yes, our take on it is that anti-poverty measures are very important. Some measures will have an adverse impact on the poor; hence the government needs to make tough decisions to reduce the fiscal imbalances that are sometimes unavoidable. So at the same time we want to make sure that adequate social protection is put in place. Let me mention two things here, one is the increased coverage of the Benazir Income Support Program, which is the indicative target under the program. There the stipends that poor people, but predominantly in rural areas, receive has a rate increase by 50 percent over the course of the program, and the number of beneficiaries has been raised to 5 million and is further increasing this year. So that is an important pillar here.

The other one I want to stress is that on the electricity tariff, while increases in tariff are, indeed, necessary to some extent to reduce the imbalance in the power sector and bring the sector to cost recovery. Other aspects of the plan are to improve the efficiency in collections and in losses in these distribution companies and to improve the fuel mix to bring down the cost of generation. That and the fact that this happened during the time of large declines in international oil prices are softening that impact and importantly, coming to the point I was going to make, the poorer consumers, the ones considering relief, are still receiving lifeline tariff and after receiving a subsidy in order to make sure that the burden of the reduced power subsidies does not fully go on the poor.

But overall let me stress that poverty, of course, is still an important issue in Pakistan that we take seriously. And while not much showing improvement, it is still something that we need to address and continue to address, including in the context of the program and beyond.

QUESTIONER: There are big suggestions coming from Pakistani authorities. For instance, announced that Pakistan will have to take another IMF program after expiry of this one. But when we asked the Finance Minister, he did not answer clearly. What is the IMF assessment? Will Pakistan need another IMF program?

MR. FINGER: Well, let me say it’s probably early to talk about it. We have another four reviews under this program that we will discuss and will try to complete with the government. So later once we get closer to the end of the program, we will discuss with the government what are the joint plans for the period after. We are, of course, open to other program requests as we are with any other member of the Fund that is in need for financing, so we will take that discussion closer to the end of the program.

QUESTIONER: There was a question about state bank, looking at about is IMF satisfied with the progress of government legislation to give independence to state bank. When would you expect that’s going to happen?

MR. FINGER: Thank you. We have a two-pronged approach under the program. One is now to see through passage of the existing amendments that have already been passed in the National Assembly and are currently in the Senate. We have a benchmark under the program for end-September, which obviously has been missed. We’re hoping for quick progress now as we go along to close out that chapter. Beyond it there are other recommendations that we gave in the context of what is called our safeguards assessment that we do with countries at the beginning of each program. So we will discuss with the government how to address the remaining recommendations from that assessment as we now go into the next review at the end of this month.

QUESTIONER: So what is your expectation of when it’s going to happen?

MR. FINGER: We’re hoping for quick passage now in the Senate so that we can all be connected and we can close the chapter on this particular reform and we can look into further refinements in the next round.

QUESTIONER: There was an article by former Finance Minister noting the outcomes. And at the end of the article he ordered a couple of reviews, in the ninth review, and we hope that IMF will continue. How do you comment on that?

MR. FINGER: We cannot yet comment on the outcome of the end-September targets. This is something that we will review and get the full data on in the context of our upcoming meetings at the end of this month. It’s usual if there are problems in the program, we will need to discuss correction actions, things that the government can do to bring it back on track and to make sure that Pakistan remains on a good path towards stabilization and increasing its sustainable rate of growth, which ultimately can then help lead to better job creation prospects.

QUESTIONER: How much impact will have on China likely economic growth for this year? What can the government do to try to offset this impact of slow China?

MR. FINGER: Yes, thank you. There is indeed a slowdown in China. It’s a gradual slowdown continued from past years, the trend of slowdown is continuing. I would say that for Pakistan, a key thing to look into would be now in cases of small risk factor if the slowdown in China were to be much worse than what is currently anticipated as a baseline, one would want to look at the implementation of the project in the context of the China-Pakistan economic corridor. These are planned to be executed over the next few years and could bring significant benefits to Pakistan on both the infrastructure side and also on the energy, the power generation side. And so it will be important to see that these projects happen and will be executed in a timely way in order to reap those benefits as quickly as possible. Of course, the execution of these projects needs to be done in a careful way with all the proper checks and balances to make sure that the maximum benefit accrues. But overall, let me say that if it’s just a gradual slowdown in China as currently anticipated as a baseline, then we would be hopeful that these projects could be executed as planned.