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EVALUATION OF THE IMF PROGRAM BY Dr. Hafiz A. Pasha* *former Finance Minister; Deputy Chairman, Planning Commission and Vice Chancellor University of Karachi.

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Presentation on theme: "EVALUATION OF THE IMF PROGRAM BY Dr. Hafiz A. Pasha* *former Finance Minister; Deputy Chairman, Planning Commission and Vice Chancellor University of Karachi."— Presentation transcript:

1 EVALUATION OF THE IMF PROGRAM BY Dr. Hafiz A. Pasha* *former Finance Minister; Deputy Chairman, Planning Commission and Vice Chancellor University of Karachi

2 The Economic Situation Growth rate remains low at about 3.5% Rate of Inflation down to 7.4% Large Fiscal Deficit of over Rs 1830 billion, 8 % of GDP Balance of Payments Deficit of $2.3 billion, with current Account Deficit:- $2.3 billion Capital/Financial Account Surplus: - % 0.0 billion Plus Repayment to IMF of $ 2.5 billion Decline in Foreign Exchange Reserves of $ 4.8 billion, from $ 10.8 billion at the end of to $ 6 billion at end of

3 The Economic Situation Peak Repayments to IMF in of $ 3.2 billion With ‘Business as Usual’ Scenario,danger of default by Pakistan, unless drastic steps taken Recourse to IMF, Global Lender of Last Resort and Policy of Government of NEW LOAN TO REPAY OLD LOAN

4 Key Features of IMF Program Three Year Under Extended Fund Facility (EFF), with focus on structural reforms Access to 425 % of Quota; Amount $6.6 billion 5 ‘Tough’ Prior Actions Initial Release of $ 544 million, 12 quarterly installments following successful ‘review’ each time 5 Performance Criteria; 11 Structural Benchmarks; 9 to be completed by June 2014

5 Objectives Of the Program ‘Stabilize First; Revive Later’ MACROECONOMIC STABILIZATION Balance of Payments Improve Balance of Payments from Deficit of $2.3 billion to surplus of $ 4.6 billion Raise FE reserves from $6 billion to $ 9.6 billion by end of BUDGET Reduce fiscal deficit to 5.8 % of the GDP from 8% of GDP

6 Policy Instruments Balance of Payments Depreciate the Rupee by 14 % Interest Rates to rise with Rate of Inflation Higher inflow of Aid from World Bank, ADB, etc., due to Program Budget Taxation Proposals in Budget of over Rs 200 billion (GST, direct taxes etc) Reduce Subsidy by substantial Jump in Power Tariff Higher taxation of Gas Cut Development Expenditure by 25 %

7 Current Position At the End of First Quarter of  Projected FE Reserves by IMF at end - September of $ 5.6 billion; Actual Reserves of $ 4.6 billion. THEREFORE, PROGRAM IS ALREADY OFF-TRACK  Projected depreciation of Rupee in the Program of 14 percent in ; Already 7 percent in the first three months  Shortfall in CSF inflow of $ 300 million  Budgetary Position is better at 1.6 percent of the GDP in first quarter of ; but almost Rs. 500 billion printing by the Central Bank (SBP)  FBR revenue growth of per cent; as compared to target growth rate of 23 per cent  ‘Core` Inflation rate close to 9 percent in September; compared to annual projection of below 8 percent in the program

8 Current Position In November, large repayment to IMF of over $700 million; FE reserves could fall to below $3.5 billion, not enough for even one month’s import cover. Therefore, rupee could come under severe pressure.

9 Projected Level of Foreign Exchange Reserves One Month’s Import Cover

10 Contingency Planning Implement Policy of Import Compression by I.early withdrawal of SROs II.regulatory duties on non-essential imports III.raise import margin requirements IV.other punitive measures  Seek more front loading of releases from IMF  Further cut in development expenditure, except for projects in power and water sectors  Implement further cuts in non-salary expenditure  Tight Limit to overdraft of Provincial Governments

11 Projection of Key Macro Economic Variables in IMFRed

12 The Future Pakistan is poised on the `Knife edge` in , even in the presence of an IMF program Danger of rising inflation and loss of growth Improvement in the economic situation will also hinge on o The Security Situation o Level of Power Load shedding If Pakistan manages to build up reserves of $7 billion or so ( 1 ½ month’s import cover) by June 2014 then conditions will improve in and beyond as net receipts will take place from IMF Pakistan can then start a program of economic revival and try to achieve 6 per cent growth rate by

13 Thank You


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