Pakistan is making great strides in its efforts to break the throttling grip of the state, close tax loopholes, and reform its creaking energy sector, but more remains to be done, the International Monetary Fund’s Pakistan mission chief Jeffrey Franks told Emerging Markets.
[The government] has made a very good start,” he said. “Energy reform has begun, and they’ve reduced some of the more egregious price subsidies.
“They’ve also started to close some of the tax loopholes and made a start on reforming their import tariff programme. These are very significant changes.”
Pakistan is just over a year into a multi-year effort to shake up its unbalanced economy. A landmark bail-out loan between the IMF and the incoming administration of premier Nawaz Sharif was signed in September 2013 with the aim of putting the South Asian state’s finances back on track.
Many fretted over the logic of extending an interest-free bail-out facility to a country with a wretched record of reneging on pledged structural reforms.
But Franks expressed his surprise at the government’s proactive stance even on tough issues such as the divestment of state assets.
“The IMF did not push or force the government to push ahead with its privatisation plan. It was the government’s idea. They told us: ‘We need to privatise’ and we said, ‘OK great, we agree with that plan’.”
The list of assets the state is seeking to cut its stake in includes Pakistan Steel Mills, air carrier PIA, and energy firm Oil and Gas Development Company. On Friday, Pakistan’s supreme court approved government plans to sell 10% of OGDC.
“Pakistan is looking to pique international interest in” firms in which it is looking to divest its shares, Franks said. “Eventually it will be able to divest stakes in far harder-to-sell firms in the energy and infrastructure sectors. It’s the only way to tackle inefficiencies in the economy.”
Hard work ahead
But much of the hard work remains to be done. Tax loopholes that benefit the wealthy, both high ranking military men and industrial titans that underpin and finance the campaigns of leading politicians, are slowly being closed. Franks pointed to the closure of a series of such holes that will save the government 0.3% of GDP in the financial year to end-March 2015.
Savings are expected to rise to 1% of total economic output by 2017, he added, with reforms set to push economic growth to 4.1% this year, and 5% in 2015. The central bank’s foreign exchange reserves, meanwhile, hit $13.4bn in the first week of October, having dipped as low as $2.8bn in February. Franks added that the government had also pledged to cut its fiscal deficit to 4.7% of gross domestic product by end-March 2015, from 8.5% when the bailout was signed.
Not everything has been smooth sailing. The IMF delayed its latest $550m quarterly loan tranche in September, following political unrest in the capital, Islamabad.
“There were hiccups with that [September disbursement], and also due to some other policy issues that we had previously negotiated,” Franks said. “There have been some delays, but the programme isn’t off-track. We are now planning to combine the fourth and fifth tranches together into one, with $1.1bn being delivered to the government in December.”