On FATF conditions, she said failure to get out of the FATF grey list could have implications of capital inflows to Pakistan. The IMF official said that $6 billion Extended Fund Facility (EFF) programme for Pakistan aim to support the economic reform programme of the country.
She said the programme focuses on decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending. The programme will help Pakistan reduce economic vulnerabilities and generate sustainable and balanced growth, she added. Moreover, the programme is expected to unlock broader support from multilateral and bilateral creditors in excess of US $38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years.
Teresa Daban Sanchez said that IMF is not here for making any profit after giving loans to Pakistan. She said that people have erroneous notion about the IMF, adding that the IMF was not making any profit after giving loans to Pakistan. The representative said that the IMF helps member countries which are facing financial problems, adding that Islamabad has entered 18 programmes of IMF.
She said the goals of the IMF package in the medium term are debt sustainability, stronger tax collection, an independent central bank, market determined exchange rates regime, and moderate inflation trajectory. "We wanted more autonomy for the central bank, strengthening of tax policy administration, reforming the energy sector, modernising the state-owned enterprises, strengthening anti-corruption institution, and progress on Financial Action Task Force (FATF) conditions," she added.
"Pakistan's foremost problem or issue is debt payments," the IMF official said and added the country spends almost 25 percent from its total revenue on the payment of debt. She said Pakistan also faces problem of Balance of Payment (BoP).
"It is positive that Pakistan's current account deficit has been reduced," she added. She went on to say that Pakistan is passing through a challenging situation as its circular debt and financial deficit is increasing. Teresa went on to say that Pakistan's revenue collection has been less than many other countries, adding that the country's debt should be 60 percent of its total GDP.
She referred to political risk major hindrances in the making of key legislations for implementation of key reforms measures. She said government has to go to Parliament for legislation, adding "We need to build consensus with others and the government has to create some kind of support for the passage of legislation."
She said that the reduction in the fiscal deficit is the cornerstone of the programme. There may be some kind of resistance. "The vested interest people who are going to be affected by the new measures might create some kind of resistance, creating difficulties," she said, adding there will be opposition to these reforms as well. She said that government is putting together a package of three years containing three main elements.
In the fiscal consolidation, the fiscal deficit has to be brought down to a sustainable level. So as to cut the debt to GDP ratio to around 60 percent of the GDP, which is manageable for a country like Pakistan. And government has to create a fiscal space through expanding revenue base for greater allocation of resources for social sectors. Tax to GDP ratio is 10 percent in Pakistan while it is 15percent in other comparable countries. She said government will have to do away with the special treatment in taxes, benefits, exemptions. "The tax base has to be expanded," she stated.
At present, the government expenditures on health is 2 percent of GDP, while it spends one percent of GDP on education. In the comparable economies, she said these spending are spending around 4percent of the GDP.
The provinces also have to contribute and play a role in the fiscal consolidation. The policies governing monetary and exchange rate have to be changed, she said, adding it has already been changed. She said the exchange rate policy has to be flexible. "We have a different level of management at the central bank. This is going to be helpful," she said. Central bank has to focus on price inflation, she said.
The third pillar is allocation of more funds for the social spending. These funds will increase with more space to be created with the implementation of the reforms. She said it is important to change the institutions to maintain what you have gained through policy measures.
She said that it is also important to strengthen the central bank. "No borrowing from the central bank." In the last few years, the government recourse to borrowing from the central bank for budget financing has led to inflation. "Such level of borrowing is inflationary. That is why we have inflation high these days," she maintained.
At the end of the three years programme it is expected that Pakistan could see an inclusive growth not like the one seen in the past driven by the consumption. There is has to be more investments. The debt level will have to be brought down to 60pc of the GDP so that to lower the interest payment. Currently, Pakistan spends 25pc of the revenue on interest payments. And the country will have a strong an independent central bank with market based exchange rate regime.
She said that the problem is not that debt has increased manifold but it has increased the interest payment liability. This means that country has no money for education, health, etc.
She said the fiscal responsibility law was also not implemented. The circular debt in the power sector has also increased in the last three years.
Trade deficit also deteriorated which is mainly because of imports which grew too fast. Because of high fiscal deficit and trade deficit, there was also policy to keep exchange rate constant. The central bank has to provide funding and the central banks have to use the reserves for the purposes. As a result, the level of reserves declined. The reserves are used to protect from shocks, she said.
She said investment in Pakistan is very low, which is around 10 percent to 12percent of the GDP which was around 20percent in other comparable economies. The investment is the future of the country. Similar was the case with the tax ratio which remains around 10 percent.
Chairman Federal Board of Revenue (FBR), Syed Muhammad Shabbar Zaidi said the incumbent government and the International Monetary Fund (IMF) are on the same page, as there was no disagreement by the government on the measures proposed by the IMF, especially the taxation measures.
He said the government will not bow down against the pressure, protests and lame excuses of the businesses and industries. He said taxation is the only way forward for equitable distribution of wealth. Shabbar Zaidi said, "We are trying to make Pakistan good for everyone."
"Due to presumptive tax regime, we actually divorce the taxation from the economy where taxing the real income was out of question," he said. He expressed resolve of the government that the real income will have to be taxed and there was no 2nd opinion on it. While raising the concerns over the open transit trade agreement with Afghanistan, he said the agreement was being exploited and abused by the smugglers which negatively impacted the local industry. Pakistan needs to review this agreement and should take stringent measures to control illicit trade on the Pak-Afghan border.
There are around 100,000 companies registered with the government of Pakistan, where only 60,000 file their returns. He said the measures taken in the current federal budget will fundamentally change the course of history of Pakistan. The government is taking steps to redress the institutional corruption through automation of the taxation system.
Shabbar Zaidi said reforms are being made in the Federal Board of Revenue under the leadership of Prime Minister Imran Khan. He said that it is his responsibility to improve the tax base under the leadership of Prime Minister Imran Khan. He said that "Hawala" and "Hundi" have inflicted a huge loss on the country's economy.
Shabbar Zaidi said that measures are being taken to include the middle class in the tax net. Replying to a question, Zaidi said that the government would desist from taking any decision which would be counterproductive for the textile industry.
He said misleading information is being spread on the issue of sales tax zero-rating, computerized national identity card issue and imposition of tax on edible items.
Later, talking to reporters, the FBR chairman said that the Board is engaged in negotiations with the business community to resolve their genuine issues.
The chairman categorically rejected rumors about his replacement as chairman FBR. He said the government would not compromise on enforcement of CNIC condition.
Dr Shamshad Akhtar, former Finance Minister, said stabilisation of the economy was very critical for the growth of the country, where one should not look stabilisation in isolation, rather a step-forward towards economic growth. She said, "There is no gain without pain, and that is what stabilisation is based upon which we will have to face."
After the period of stabilisation coupled with key structural reforms across the board, the economy will get out of crisis, she added. The major economic challenges of the country are high consumption, low production and low savings and investments. The gap is widening between saving and investments, which pushed the country to seek foreign assistance.
While talking on IMF programme, Dr Shamshad said the substantial delay in going to IMF programme compounded the uncertainty, which negatively impacted the economy. She said, "If we had negotiated the programme earlier, the country's economy would probably be in the safer zone." The investor's confidence has gradually eroded, which the government needs to look at, she added. The IMF policies usually are dynamic which may help Pakistan address fiscal imbalances, she hoped.
Dr Abid Qaiyum Suleri said at the very beginning there was lack of ownership from the government on the IMF programme, which made the programme controversial. He said the letter of intent of the current government to IMF focused on expanding social safety nets to cushion the impact of the needed stabilisation policies on the poor, which is positive step. However, the government needs to strengthen its social protection programmes and should focus on direct taxation to help reduce burden on the vulnerable segment of the society, he added.