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IMF: Pakistan should let market forces decide rupee’s fate

The International Monetary Fund (IMF) has asked Pakistan to let market forces decide the fate of the rupee and go for a total free-float of the exchange rate, which the finance ministry is reluctant to accept due to its adverse implications for the economy.

Instead of accepting the condition of allowing market forces decide the value of the rupee, the Pakistani authorities are willing to further weaken the currency, said officials in the Ministry of Finance and the State Bank of Pakistan (SBP).

The IMF was taking an extreme position on the exchange rate due to the almost fixed value of the currency when Ishaq Dar was leading the finance ministry.

The officials said the total free-float of the exchange rate was not acceptable to Pakistan but the finance ministry was willing to let the currency depreciate that may largely reflect market fundamentals.

Policy talks with the IMF for the bailout package have reached a critical stage where both the sides are now penning down the conditions. These conditions have to be met before the approval of the loan by the IMF board and during the programme implementation period.

There is also difference of opinion on the extent of further currency devaluation by June 2019, according to the sources. The IMF is asking for a massive devaluation, which if accepted could push the rupee far above Rs150 to a dollar in coming months, they added.

The rupee traded at 133.89 to a dollar in the inter-bank market on Friday. Since December last year, Pakistan has let its currency weaken by 26.6%. Still, the IMF experts believe it is not enough, they added.

Since January, Pakistan has increased interest rate by 275 basis points to 8.5%, which is the highest increase by any Asian country.

Finance Minister Asad Umar has also reached out to independent economists and members of the Economic Advisory Council to get their views on the total free-float of the exchange rate as demanded by the IMF, said the sources.

These experts have also opposed the IMF demand, urging the government to continue with the ‘managed market-based exchange rate regime’ but more aligned to the economic fundamentals, according to the sources.

They argued that the total free-float will be disastrous for Pakistan. They were of the view that a total free-float would not work due to the very thin size of Pakistan’s currency market, apprehending that the few dealers would exploit the government.

The currency depreciation also carries serious implications for the inflation rate, which is already on the rise, touching a four-year high.

Pakistan implemented a fixed exchange rate system from 1947 to 1982. Then a managed floating exchange rate system was adopted in January 1982.

Since 2000, the country is theoretically following a market-based exchange rate but the SBP has been pumping billions of dollars annually to keep the rate at a level desired by the Q-block.

The IMF is also demanding more autonomy for the central bank, said the sources. Finance Minister Umar is willing to give full autonomy to the SBP for determining the value of the currency.

Pakistan’s foreign exchange reserves dipped to $7.4 billion last week. The reserves have also been used during the Pakistan Muslim League-Nawaz (PML-N) government’s tenure to defend the value of the rupee.

Pakistan’s external-sector vulnerabilities would not be fully addressed by the exchange rate tool alone and the government will have to apply a combination of interest rates hike, currency depreciation and administrative measures to contain aggregate demand in the economy.

Economic theories suggest that the currency devaluation could boost exports in a big way but Pakistani exporters heavily rely on imported raw material. One dollar worth of exports requires 35 cents for imported raw material, according to independent experts.

Secondly, the historical evidence suggests that 10% depreciation of the currency curtails the import bill by only 3%.

During a recent Business Advisory Council meeting, the country’s leading industrialists suggested to the prime minister that there should not be more devaluation and interest rates hikes – the demands that the government cannot meet due to upcoming monetary policy adjustments.

Provinces in unison oppose change in NFC: talks with IMF

The provinces have unanimously told the International Monetary Fund (IMF) that they would oppose any structural change in the National Finance Commission (NFC) award.

However, they assured the fund of providing Rs286 billion cash surpluses to help the Centre achieve its fiscal targets.

In this regard, the IMF team held a meeting with the four federating units’ officials to get to know their fiscal policies under its bailout programme, government officials told.

The provincial finance ministers and secretaries attended the meeting held on Friday. Discussions took place on the distribution of resources under the NFC award and provincial budgets.

The officials said the provinces have taken a unanimous position that they would not support any change in the NFC formula. The provincial finance ministers urged the IMF to ask Islamabad improve performance of the Federal Board of Revenue (FBR) instead of blaming the federating units.

Punjab Finance Minister Hashim Jawan Bakht suggested that the provinces should be given a say in formulation of the FBR’s tax policies, said the officials. The provinces showed their resolve to support the federal government even at the expense of stifling their economic growth rates due to savings.

Only Punjab’s economy, which contributes 54% to the total national output, is expected to slow down to 4% to 4.5% due to cut in development budget in this fiscal year. This will also have implications for national economic growth rate that may now slip even below 4%.

According to the 7th NFC Award, the provinces get 57.5% of the federal divisible pool. The award had been agreed in 2010 that expired three years ago but president of Pakistan extends it every year since there is no new award.

The IMF’s view was that the current NFC award is not favouring the Centre whose borrowings to meet its obligations have skyrocketed since then. The 2010 award that transferred 10% additional sources to the provinces had been finalised on the assumption that the FBR would increase its collection by 1% of GDP every year. But it did not happen and the FBR-tax-to-GDP ratio remained almost stagnant.

“The NFC structural framework should not be altered, as it is a consensus decision of all the stakeholders,” said Khyber Pakhtunkhwa Finance Minister Taimur Khan Jhagra while talking to source after the meeting.

Jhagra said the overall fiscal deficit was responsibility of the federal and provincial governments but changing flows of revenues from Centre to provinces and provinces to Centre is not the answer to it.

“The IMF does have a mandate to look at fiscal numbers but it cannot question the constitutional arrangement,” said Jhagra while responding to a question.

The Ministry of Finance has been campaigning to cut about 6% of the divisible pool for meeting expenditures of security and special areas being administered by the Centre.

At least two federating units told the IMF that they would honour their commitments of providing cash surplus to the Finance Ministry, which is very critical for achieving the fiscal consolidation under the IMF programme. The Finance Ministry has budgeted Rs286 billion cash surplus for achieving the revised budget deficit target being agreed with the IMF.

Punjab finance minister is said to have told the IMF that the provincial government would save nearly Rs148 billion out of its budget, which is already reflected in its budget.

There is a debate within the Punjab government about saving a huge chunk and its implication for provincial economic growth rate. The publication, “The Growth and Inequality in Pakistan” by Dr Hafiz Pasha showed that Punjab had a share of 54% in national GDP in 2016-17. The next economy in terms of size is Sindh, with a share of 30%. The K-P and Balochistan have shares of 13% and 3%, respectively.

Punjab’s economy grew 6% in the last year of the Pakistan Muslim League-Nawaz (PML-N) government, which is now expected to slow down to 4% to 4.5% due to projected budgetary savings.

In the last fiscal year, the provincial government had spent Rs411 billion on development but Punjab Chief Minister Usman Buzdar’s government has planned to spend only Rs238 billion in this fiscal year.

“The provinces do not have much cash surpluses due to their socio-development needs but the K-P government remained committed to providing Rs30 billion cash surplus in this fiscal year,” said Jhagra.

He said providing cash surplus is not the permanent solution as there is a need to enhance the FBR collection. He said the provinces should be given representation at the FBR policy board.

The K-P finance minister also underlined the need to improve expenditures management by the federal government, saying it should cut losses of loss making enterprises.

Tajikistan introduces giant dam for power export to Pakistan

Tajikistan inaugurated on Friday a $3.9-billion hydroelectric power plant, a mega project that will enable the impoverished country to eliminate domestic energy shortages and export electricity to Afghanistan and Pakistan.

Built on the Vakhsh River in southern Tajikistan, the plant championed by President Emomali Rahmon is expected to reach a height of 335 metres (1,099 feet) in a decade, becoming the world’s tallest hydroelectric dam.

The first of six turbines in the Rogun hydroelectric dam went on line on Friday, with the power plant expected to reach capacity of 3,600 megawatts – the equivalent of three nuclear power plants – when completed.

At present, Rogun still resembles a vast construction site, with rocky earth covering the territory from which the powerful Vakhsh flowing through the Pamir mountains was diverted.

In 2016, Rahmon, who is a former collective farm boss, climbed into a bulldozer at a groundbreaking for the dam, as a sign of president’s personal attachment to the project.

It will double energy production in the country of nearly nine million people, alleviating a long-lasting, debilitating national energy deficit. Surplus energy will be sold to neighbours such as Afghanistan, Pakistan and Uzbekistan.

Plans to build a dam in southern Tajikistan date back to the Soviet era, but the project was scaled up following the breakup of the Soviet Union in 1991.

In 2017, Tajikistan raised $500 million from an inaugural international bond to help finance the construction.

Authorities hope that once the dam goes online it will generate money to finance further construction.

Observers say the project is massively significant for a country that lost tens of thousands of people in a civil war in the 1990s when rebel groups rose up against the government.

Rogun has become “a concept for national consolidation,” political analyst Abdugani Mamadazimov told AFP.

There have been calls by public figures to rename the dam after Rahmon.

People’s Democratic Party of Tajikistan Chairman Saidjafar Usmonzoda told AFP such a tribute would only be fitting given Rahmon’s “heroic accomplishment” making Rogun a reality.

If it ever reaches the planned height of 335 metres, the dam will be 30 metres taller than the recently-built Jinping-I Dam in China and 35 metres taller than Tajikistan’s own Soviet-era Nurek dam, also on the Vakhsh River.

The project overseen by the Italian company Salini Impregilo has a number of risks.

Observers warn that Tajik authorities do not appear to concern themselves with the environmental sensitivities of Rogun, given Rahmon’s close involvement.

Rogun is located “in a highly seismic area and several geological studies have warned about the risks of building such a large dam in this setting,” Filippo Menga, a lecturer in human geography at the University of Reading in the United Kingdom, told AFP.Geopolitical tensions surrounding the project have, for the moment, subsided in a region that suffers from water scarcity.

Uzbekistan’s late leader Islam Karimov once hinted that his downstream agriculture-dependent country might go to war over Rogun and a similar project in neighbouring Kyrgyzstan.

But Uzbek opposition to the dam has evaporated since Karimov’s death in 2016 and in an incredible turnaround, the 32 million population could become one of Rogun’s early clients.

Speaking ahead of the launch, Deputy Head Engineer Sukhrob Ochilov summed up the celebratory mood surrounding the keystone project.

“I have been waiting for this moment,” he said. “Rogun coming online means the construction of new factories, economic progress and jobs for our people.”

Trade with Pak: Russian envoy for opening banking channels

Bilateral trade between Pakistan and Russia can be enhanced to a historic high if direct banking channels are established between the two countries, suggested Russian Ambassador to Pakistan Alexey Yuievich Dedov.

Speaking at a meeting at the Lahore Chamber of Commerce and Industry (LCCI), the ambassador said currently trade between Pakistan and Russia was encouraging and it would be enhanced further once chairman of the Trade and Economic Commission was appointed as agreed between prime ministers of the two countries.

“In upcoming years, the chances of enhancing trade are bright,” he remarked.

Speaking on the occasion, Russia Trade Representative Yury Kozlov recalled that two years ago, the Russian central bank and National Bank of Pakistan (NBP) had decided to set up a branch of NBP in Russia “but it never happened.” “Both the countries face huge monetary losses while conducting mutual trade as payments have to go through other channels like Dubai, etc,” he said.

Replying to questions from businessmen and traders, the trade representative welcomed the idea of barter trade between the two countries.


6 power firms tasked with extra recovery of Rs 82 bn

The Power Division has set 100% recovery target for current electricity bills and has also given the task of recovering old receivables for financial year 2018-19 to six distribution companies.

This would bring an extra Rs82.2 billion and improve liquidity of the power sector, the Power Division said in a statement issued on Friday.

The decisions were taken in a meeting chaired by Federal Minister for Power Division Omar Ayub Khan. Power Division Secretary Irfan Ali, officials of Pakistan Electric Power Company (Pepco), CEOs of relevant distribution companies and other officials of the Power Division were present in the meeting.

They decided to freeze old receivables at levels reached on October 31, 2018 with 100% recovery targets for current bills besides reducing line losses in line with the goals set by the National Electric Power Regulatory Authority (Nepra).

The power minister pressed the CEOs to eliminate electricity theft and illegal hooking as well as take strict action against those involved in such activities with the help of task forces formed by Punjab and Khyber-Pakhtunkhwa.

The Power Division secretary also emphasised that the CEOs should ensure that defaulters were not able to consume electricity through illegal connections and the drive must be intensified against them without any fear or favour.

According to the targets given to the distribution companies, the Lahore Electric Supply Company (Lesco) will make extra recovery of Rs25 billion in addition to collecting current bills up to June 2019. The company can achieve the target by taking measures for the recovery of old outstanding bills and reducing line losses by up to 1%.

Similarly, the Faisalabad Electric Supply Company (Fesco) will recover an extra Rs2 billion in addition to receiving current bills up to June 2019. It will also reduce line losses by 1%.

Islamabad Electric Supply Company (Iesco) will ensure additional recovery of Rs2 billion from the old receivables and bring line losses to the target of 8.65% set by Nepra.

Multan Electric Power Company (Mepco) will ensure extra recovery of Rs10.2 billion by reducing line losses to match Nepra’s target of 15% and by collecting old receivables.

For Peshawar Electric Supply Company (Pesco), the target for extra recovery above the current bills was set at Rs41 billion by reducing line losses to 4% and collecting old receivables.

Pesco will remove illegal connections within a timeframe of two months and the sub-divisional officers (SDOs), executive engineers (XENs) and superintending engineers (SE) concerned will be responsible for this programme.

It was decided that the Pesco CEO would launch an awareness campaign to inform consumers that their wrong bills would be corrected and electricity meters would be installed immediately after the payment of dues. It will also lead to a reduction in load-management hours in their areas.

The power minister directed strictly that no overbilling or unfair means would be adopted for achieving the targets. In this regard, the Power Division and Pepco will establish a comprehensive monitoring mechanism.

“All the CEOs shall personally supervise the drive against theft and shall meet the district administration in this regard,” he said.

Govt faces tough choice as IMF recommends harsh tax initiatives

The International Monetary Fund (IMF) has asked Pakistan to slap new taxes worth nearly Rs160 billion including raising the standard general sales tax (GST) to 18%, putting the Pakistan Tehreek-e-Insaf (PTI) government in a difficult position as it has promised a reduction in the indirect tax burden.

The IMF mission has sought tax efforts equal to 0.4% of gross domestic product (GDP) or Rs160 billion as part of an overall steep fiscal adjustment under the programme, said highly-placed sources in the Ministry of Finance.

It has also asked the Federal Board of Revenue (FBR) to prepare a strategy for releasing tax refunds and present it to the Fund before the end of policy talks.

Besides the Rs160-billion tax efforts, the IMF has suggested improving revenue collection at the import stage due to 26% rupee depreciation since January this year and further devaluation under the IMF programme, they added.

The authorities are working out the tax target on the basis of a minimum 12.5% nominal GDP growth rate.

The total impact of new taxes, administrative efforts and windfall gains from the currency devaluation is estimated at around 0.9% of GDP, the sources said. However, Pakistani authorities have not yet accepted these demands, claimed the finance ministry sources. Unlike in the past, when the Q-block was spearheading the policy talks, this time State Bank of Pakistan Governor Tariq Bajwa is playing the lead role due to his experience as the finance secretary and FBR chairman.

Pakistan and the IMF have been negotiating a bailout package aimed at avoiding default on international payments. Pakistan is also in negotiations with the United Arab Emirates and China to secure financial packages. No announcement has been made at the end of a bureaucrats-led mission to China on Sunday.

Pakistan booked the highest-ever current account deficit of $18 billion in the last fiscal year, which eroded its foreign exchange reserves. The deficit has started shrinking marginally, standing at $4.84 billion in the July-October period, down by 4.4%.

The IMF is asking Pakistan for a steep fiscal adjustment as it wants to see the budget deficit at around 3.5% of GDP at the end of its programme. The authorities are relying mainly on tax efforts to cut the deficit as there is a little room on the side of expenditures, said the sources.

The sources said one of the major demands of the IMF is to increase the GST rate by at least one percentage point to 18%. This will fetch a minimum Rs75 billion to Rs80 billion in additional revenues annually. In the remaining period of the current fiscal year, the 1% additional GST could fetch around Rs40 billion, the officials added.

At one stage, the IMF had asked Pakistan to increase the GST rate to 19%, they added. Last time, Pakistan had increased the GST by 1% to 17% under the previous three-year $6.2 billion Extended Fund Facility (EFF).

The FBR also charges higher-than-the-standard 17% GST from unregistered people, which currently stands at 3%. In case the government accepts the IMF demand, this rate will go up to 21%.

Pakistan’s direct tax collection is around 37% of the total collection including withholding taxes. The government has promised to reverse the current taxation policy, which is not only regressive but is also hurting the poor more than the affluent.

It will be a challenge for the government to impose new taxes as well as strike a balance between direct and indirect taxes.

The officials said the IMF was demanding that Pakistan also increase the income tax rates. However, there is little room for this as the FBR has already tapped almost every possible avenue, the sources added.

After coming to power, the PTI government had reduced the FBR’s annual tax collection target to Rs4.398 trillion. In the first four months of current fiscal year, it suffered a shortfall of Rs68 billion despite announcing a mini-budget two months ago.

It is not clear whether the Rs160 billion worth of additional taxes are aimed at increasing the overall target to Rs4.560 trillion or some of these measures will cover the shortfall.

During a meeting with Prime Minister Imran Khan, Finance Minister Asad Umar had talked about the possibility of new tax measures due to the FBR’s failure to meet its targets. The sources said the IMF has been assured that the FBR would be able to recover the shortfall in the coming months by collecting Rs45 billion through audit cases. Another Rs55 billion will be recovered by settling the cases stuck in litigation.

The officials said another possible avenue to meet the IMF’s demand could be to raise sales tax rates on petroleum products, which are currently far below the standard rate.

The government is charging 12% GST on high-speed diesel and only 4.5% on petrol. One indication of accepting the IMF demand will be that the GST rates on petroleum products could go up from December 1.

The lower GST rates on petroleum products are affecting tax collection by around Rs8 billion per month, according to the sources.

ECC permits cement barons to raise prices

The Economic Coordination Committee (ECC) has given a free reign to cement industry barons and allowed them to increase prices, which will provide them an additional income of billions of rupees.

Officials told that Adviser to the Prime Minister on Commerce Abdul Razak Dawood had supported the cement lobby’s stance that they should be given a free hand in increasing prices and recommended the ECC not to intervene in the affairs of the industry.

A brief presentation on the demand and supply situation was given by the Ministry of Industries and Production to the ECC on October 2, 2018.

The ECC had directed that the adviser hold a meeting with the cement manufacturers association with a view to rationalising the prices of cement and submit a report with recommendations to ensure availability of cement in the market at reduced prices.

In line with the ECC directive, Dawood convened a meeting on October 26 with major stakeholders including representatives of the All Pakistan Cement Manufacturers Association (APCMA) and other cement producers. It was noted that energy was a major component of the cost of production that was being supplied through coal. So, the recent increase in prices of coal and subsequent depreciation in the rupee had an effect on the cost of production and prices.

It was also pointed out that freight cost of the cement sector was high at Rs54 per bag. Therefore, the industry was already operating at a high cost of production. It was informed that the recent price hike was due to wholesalers and retailers as ex-factory prices had not changed much.

It was informed that the cement industry paid Rs111.20 billion in taxes in financial year 2017-18 in which the share of federal excise duty was Rs50 billion while general sales tax stood at Rs60 billion. The Ministry of Industries and Production said despite the high cost of production and higher taxes, the price of cement in Pakistan was Rs579 per bag, which was lower than Rs680 and Rs657 in India and Sri Lanka, respectively.

The ministry proposed that the government should not intervene in the cement industry and let market forces determine the prices.

In October: current account deficit widens 34 pc, amounts to $1.21 bn

The current account deficit (CAD) – which is set to keep putting pressure on foreign currency reserves in the current fiscal year as well – widened for the second consecutive month in October due to an unwanted growth in imports and likely dividend payments.

The deficit grew 34% to $1.21 billion in October compared with $909 million in the previous month, the State Bank of Pakistan (SBP) reported on Thursday.

“Higher imports and likely dividend payments to foreign investors caused the widening of the deficit,” Arif Habib Limited Deputy Head of Research Tahir Abbas said while talking to source.

Cumulatively, in the first four months (July-October) of the current fiscal year 2018-19, the deficit, however, shrank 4.6% to $4.84 billion compared with $5.07 billion in the same period of last year mainly due to a notable growth in remittances from overseas workers and reduction in the trade deficit on services, he said.

The reduction in the deficit also came after the government revised the deficit upwards by $1 billion to a record high of $18.99 billion for the previous fiscal year.

Finance Minister Asad Umar commented the other day that the current account deficit for FY18 was unsustainable.

The central bank has let the rupee depreciate by a massive 27% against the dollar and has increased the benchmark interest rate by 275 basis points to 8.5% in the past 11 months in a bid to narrow down the deficit.

The measures will, however, lead to a slowdown in economic growth to 4.7-4.8% in FY19 compared to a 13-year high growth of 5.8% achieved in the previous fiscal year, according to independent economists.

The 13-year high GDP growth in FY18 was achieved at “the cost of widening macroeconomic imbalances as manifested in the five-year high fiscal deficit and a record high current account deficit,” the central bank said in a recent report on the country’s economy.

The rupee depreciation was aimed at achieving higher exports and worker remittances. Though the devaluation has made imports expensive, it has largely failed to curb goods inflow.

Imports grew significantly to $4.71 billion in October compared with $3.79 billion in the previous month, according to the central bank.

Moreover, dividend and interest payments to foreign investors surged 41% to $521 million under the head of ‘balance of prime income’ compared with $370 million in the previous month.

On the other hand, exports improved 15% to $2.06 billion compared to $1.80 billion. Remittances registered a strong increase of 38% to $2 billion in October compared to $1.45 billion in the previous month.

Cumulatively, in first four months of the current fiscal year, the remittances grew 15% to $7.42 billion compared with $6.44 billion in the corresponding period of last year.

The notable growth in remittances lent much-needed support to narrowing down the deficit in the current fiscal year to date.

Moreover, “a 34% reduction in the trade deficit on services to $1.09 billion from $1.65 billion also helped narrow down the deficit in the four months,” Abbas added.

The trade deficit on goods, however, grew 7.2% to $10.50 billion in the four months compared to $9.79 billion in the same period of last year.

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