Tuesday, February 7

IMF package to Pakistan: We put focus on increasing revenues by broadening tax base: IMF official

Washington:Ernesto Ramirez Rigo, Mission Chief for Pakistan in the IMF Middle Eastern and Central Asia Department said on Saturday that the overarching objective of the authorities program is to restore external and internal balance in Pakistan so that it can resume sustainable growth.

“I think the government’s program that is now supported with the Fund program has two main pillars and then I will develop a little bit each one of them to explain them. The first pillar is obviously macroeconomic stabilization. The second pillar is to strengthen and build institutions. On the first pillar of macroeconomic stabilization that is critical for restoring external and internal balance. The focus on the fiscal side given the large deficits and the high debt is to basically improve revenue mobilization,” Rigo said in the Conference Call on the Release of the IMF Staff Report on the Extended Fund Facility Arrangement for Pakistan.

According to Rigo, throughout all of our discussions with the authorities and other stakeholders, I think we all came to the same assessment and it is the main problem in Pakistan its low level of revenue collections relative to GDP and relative to many other emerging markets and peer countries. So there is where we have put the focus. We have put the focus on increasing revenues by broadening the tax base, not by increasing tax rates while making sure that the share of population contributing to revenues is increased and in trying not to continue with exemptions and concessions which have been a major source of leakage in the tax base.

The IMF official said in addition to that, of course, given the external sector conditions, they had put focus on having a flexible market determined exchange rate which should help restore balance, and which was going to help develop the local financial markets which were fundamental for growth and in the medium term every country needed to have financial deepening. The flexible market determined exchange rate will also improve the conditions for local producers and for the exporting sector.

In addition, there is a third pillar on the macroeconomic stabilization is basically increasing social spending. As everybody knows and as you probably have already analyzed the budget, there is quite a substantial increase on some of the social programs included in the budget. That is something that we very much welcome and we definitely wanted to make sure that the adjustment was on the revenue side, not on the expenditure side and I think the budget sends quite a strong signal in that direction, the IMF official said.

Rigo said: “Now let me turn to the other main pillar of the adjustment which is building institutions. This is going to have to be done in parallel, so it is not the sequencing is going to be — is going to follow at the same time as the macroeconomic stabilization is put in place. And this is basically about improving business, doing business in Pakistan. About reducing red tape, streamlining the regulations, having tax policy reform that includes the tax system in Pakistan which we all know is very complex and difficult to navigate and is not something that businessmen look at as a positive.”

“We want to have increasing investment and obviously there will have to be an accompanying reduction in consumption. So more investment, less consumption, more exports, more green field operations in Pakistan is something that we are looking for. And we are also going to — we are also hoping that through improved tax compliance and a new system of tax administration that will be quite an incentive for investors.”

Rigo said the IMF program basically is going to act as a catalyst where we basically provide a framework on which many other international partners are going to be participating. And the total amount of financing that the program is going to be unlocking is around $38 billion. I think you might have seen already that in our press release after the approval of the program.

Basically, the Fund opens the door for bilateral countries and multilaterals to also extend the financing to Pakistan. The World Bank, ADB, the Islamic Development bank, and so on, to also come in and provide additional financing. This financing should — will help release pressure and allow time for the reforms to take hold in Pakistan, Rigo concluded.