ISLAMABAD (Dec 20, 2018) — Imran Khan’s newly elected government has offered the International Monetary Fund (IMF) to impose additional taxes to restrict budget deficit and to further increase interest rates and devalue currency to increase foreign exchange reserves–a position both sides have found common grounds but differ on its quantum, timing and policy executions.
It is expected that the two sides will close the gaps anywhere between January and March, said Fitch rating agency earlier this week. And on Wednesday, Finance Minister Asad Umar said the financial aid received from Saudi Arabia, China and the United Arab Emirates (UAE) will be sufficient to cover the fiscal deficit for the current year ending June 2019.
Still, the economic crisis warrants more tempering than quick-fixes. “All economists advised the government to seek an IMF bailout,” Umar said.
According to reports, Pakistan team is willing to impose Rs190 billion additional taxes to restrict budget deficit to Rs2.2 trillion. It has also offered to further increase interest rates and devalue currency to increase foreign exchange reserves to $13 billion–equal to around 2.5 months of import.
The increase in interest rate could be between 50 basis points to 100 basis points over the current rate of 10%.
The plan also includes over Rs300 billion anticipated earnings from sale of two government-owned LNG-fired power plants plus additional from sale of 3G and 4G licenses by the Pakistan Telecommunication Authority (PTA).
The government has proposed that it stood ready to further adjust the exchange rate in the current fiscal year, which would also be a tool to get additional revenue collection at the import stage. Further currency devaluation will be close to the adjustment made in October.
Also, against the free float demand by the IMF, the SBP has proposed to pursue flexible exchange rate policy.
These measures would help build up fiscal strength but will reduce economic growth rate that will plunge to 3.9% this year – down from 13-year high level of 5.8%.
“The economic growth rate will be subdued in the first year but the sustainable rate will pick up from ensuing years,” said Dr Khaqan Najeeb while commenting on the possible adverse impacts of the IMF programme.
Pakistan and the IMF on Wednesday held another video conference aimed at narrowing down their differences. “Fruitful discussions were held and the IMF raised certain queries on the policy document,” said the Finance Ministry spokesperson Dr Najeeb Khan. He said both the sides have agreed to keep engaged to further narrow down the policy differences.
The bailout program Pakistan seeks from the IMF ranges between $6 billion and $8 billion. Still, structural reforms and recalibrating priorities to create a sustainable base for growth would be remain on the front-burner–politics notwithstanding.