ISLAMABAD: The International Monetary Fund (IMF) said on Monday that it had full access to borrowing and maturity terms of the China-Pakistan Economic Corridor (CPEC) projects and its loans were manageable.

Addressing Senior Journalists’ Forum at the National Press Club, IMF resident representative in Islamabad Teresa Daban Sanchez counted issues relating to the Financial Action Task Force (FATF), provincial spending behaviours and insufficient parliamentary strength of the government as key risks to its $6 billion 39-month bailout programme.

She said Pakistan had shared full details of CPEC loans with the IMF, adding that CPEC was mostly private sector investment in energy and infrastructure. In reply to a question, the IMF official said energy projects had no doubt helped the country deal with acute shortages of power and this was a very positive aspect. She said the debt sustainability analysis showed that CPEC loans were manageable, but the country’s overall debt situation was not sustainable.

Teresa Sanchez counts FATF, provincial spending behaviours, govt’s insufficient parliamentary strength as key risks to $6bn bailout programme

Responding to a question, Ms Sanchez said fiscal consolidation and revenue mobilisation, market-based exchange rate and social sector protection were three basic pillars of the new IMF programme, adding that fiscal consolidation should be revenue-oriented to deal with the problems of fiscal deficit because the country had a very low tax-to-GDP ratio and needed to increase revenue which was being done through removing tax exemptions and privileges.

The IMF official said there was a strong need for greater coordination with the provinces to ensure that they spent less and provided budget surplus to the federal government. She said the IMF did not place any condition to bring changes in the National Finance Commission’s resource distribution formula, but it did get a commitment of fiscal federalism under a memorandum of understanding signed by the federal and provincial governments on revenue surplus and harmonisation of taxes for improved revenue collection.

Ms Sanchez said one of the most important pillars of the IMF programme was the market-based exchange rate, with the central bank in the background, to achieve price stability through forward looking actions to deal with inflation.

Speaking about key reforms in the programme, she enumerated implementation of financial management to instill fiscal discipline in the public sector, autonomy to the central bank, energy sector improvement, strengthening of anti-corruption agencies and compliance with the FATF.

Talking about key risks to the programme, Ms Sanchez noted the lack of majority of the ruling party in parliament, fiscal slippages, large amount of rollover need for short-term debts and FATF’s grey list that could have implications for capital inflows to Pakistan and jeopardise financing assurances under the IMF programme from the World Bank, Asian Development Bank and key bilateral partners.

She said the first review of the programme would be completed before December this year. Asked if Rs14bn or so shortfall in revenue collection during the first month of the fiscal year would trigger the IMF call for mini-budgets if the trend continued, she said the Fund programmes were not based on the one-month performance.

Responding to a question, she said the increase in prices of utilities was a complex matter because it increased circular debt, stiffened liquidity for the entire power sector and required the government to borrow more. Eventually, this contributed to the overall public debt that was already alarmingly 80pc of GDP. The power sector’s efficiency was very critical for the country’s industrial sector and its growth, she emphasised, adding that about 30pc of revenue was going to interest payment and there was little space for the social sector, especially in health and education.

Regarding the FATF, Ms Sanchez said the IMF had to make sure that countries had legal framework conductive to prevention of money laundering and it had to look at this aspect when a country approached it for support. “The IMF could continue dealing with countries into grey or blacklist but it will have impact on capital inflows,” she said, adding the IMF board wanted to examine matters relating to money laundering and terror financing because it hampered the taxation system.

She said it was unfortunate that Pakistan had availed 18 IMF programmes since 1958 and only one programme from 2013 to 2016 was fully disbursed and completed successfully.

Responding to a question, she said inflation might further go up and growth stay subdued over the short term but with the IMF programme aimed at stabilising the economy, inflation would start receding and growth would pick up in the long term.

Asked if the IMF had also sought a reduction in defence spending, she said the Fund did not get involved in micro-management but got commitment from authorities to ensure social spending on vulnerable segment of society.

Ms Sanchez said Pakistan followed growth based on consumption and without required level of investment-to-GDP ratio. “This growth model cannot deliver sustainable growth,” she said, adding that the country led to ballooning fiscal and current account deficit while the discount rate on the lower side and overvalued exchange rate resulted in the rising budget deficit and current account deficit.

Published in Dawn, August 6th, 2019