IMF suggests higher interest rate, rupee depreciation

[ni8mare]

IMF suggests higher interest rate, rupee depreciation
By Shahbaz Rana
Published: October 4, 2018

Another key concern for the IMF was that the government appeared complacent and was not moving swiftly to address macroeconomic imbalances, threatening the country’s economic viability. PHOTO: FILE

ISLAMABAD: As disagreement persists on the measures required to put the economy back on a strong footing, the International Monetary Fund (IMF) has suggested to Islamabad to raise interest rate to double digits and let the currency weaken by at least 15% more in the current fiscal year.

During ongoing parleys, the IMF termed recent fiscal and monetary adjustments by Pakistan inadequate, said highly placed sources in the finance ministry. Headed by its Washington-based mission chief Harald Finger, the staff-level talks are expected to be concluded on Thursday.

Another key concern for the IMF was that the government appeared complacent and was not moving swiftly to address macroeconomic imbalances, threatening the country’s economic viability.

During the last leg of the staff-level talks, the IMF assessed that the budget deficit may widen to over 5.5% of gross domestic product (GDP) or Rs2.1 trillion, even after the additional revenue measures introduced through a mini-budget, according to sources.

The major difference of opinion between Pakistan and the IMF was on the extent of currency depreciation, increase in interest rate and fiscal impact of recent budgetary measures, sources said.

The IMF desired that Pakistan should increase interest rate to around 11%, terming the current 8.5% rate insufficient to restrict inflation and narrow down the current account deficit, they said.

Another key point of disagreement was the exchange rate parity. The central bank was of the view that the exchange rate of Rs 137 to a dollar by the end of current fiscal year in June 2019 would be sufficient to address the challenges, an assessment that the IMF did not agree with, sources said and added the fund wanted the rupee to be traded above Rs 145 to a dollar.

“The IMF is still in the process of finalising its assessment of the economy and it will be premature to comment on its recommendations,” said Special Secretary Finance Noor Ahmad, who is also the ministry’s spokesman.

At this point, it is not binding on Pakistan to accept the IMF’s recommendations as the country has not formally made a request for bailout talks.

Pakistan needs to raise $20b to avoid payment crisis

However, in case Pakistan decides to obtain an IMF loan to bridge its yawning external financing gap, the double-digit interest rate and further depreciation of the rupee could become a priority, the sources said.

Dr Ashfaque Hasan Khan, a member of the Economic Advisory Council, said on Tuesday that the Ministry of Finance had made up its mind to seek the IMF programme. Since January this year, Pakistan has already increased interest rate by 275 basis points to 8.5%, which is the highest increase by any Asian country.

Similarly, Pakistan has also let its currency weaken by 11.2% since January. India is the only country whose currency has lost over 12% during this period, which is more than Pakistan’s depreciation.

Sources said the central bank was of the view that the depreciation in the current fiscal year should not be more than 22%. But due to extremely low foreign currency reserves of $9 billion, a widening budget deficit and higher current account deficit, the IMF’s assessment was that the rupee should weaken around 30%, they added.

Another key difference of opinion was the extent of budget deficit, which the IMF was projecting at 5.5% of GDP – almost half a percentage point higher than the revised target set by the government.

Sources said in case Pakistan obtained another IMF programme, the government may have to introduce another mini-budget.

The IMF was of the view that due to the higher budget deficit, the central bank would be required to further tighten the monetary policy. It observed that a 25-basis-point increase in interest rate would not have a major impact on Pakistan’s economy.

But the Ministry of Finance took the stance that a balanced monetary and fiscal tightening would be required to grow at a rate of over 5%, stated the sources.

Moreover, the IMF’s assessment was that Pakistan’s growth rate would slow down to around 4.8% in the current fiscal year due to the tight monetary and fiscal adjustments. As against Pakistan’s assessment that inflation would soar to 6.5%, the IMF was projecting 7.5% inflation.

IMF request for CPEC contract details declined

Core inflation, measured by excluding food and energy commodities, jumped to a four-year high of 8% in September, according to the Pakistan Bureau of Statistics.

Published in The Express Tribune, October 4th, 2018.

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Read more: Dollar , economy , IMF

 

[IceCold]

As usual an Indian so concerned about what happening between Pakistan and IMF.

 

[VCheng]

The central bank was of the view that the exchange rate of Rs 137 to a dollar by the end of current fiscal year in June 2019 would be sufficient to address the challenges, an assessment that the IMF did not agree with, sources said and added the fund wanted the rupee to be traded above Rs 145 to a dollar.

I have already said the PKR will settle around 150 per USD in about two years, and then remain steady for the rest of the term of this government if they implement good policies.

 

[Baghial]

I have already said the PKR will settle around 150 per USD in about two years, and then remain steady for the rest of the term of this government if they implement good policies.

150 sounds like a nice number............

we will be bankrupt sooner /then later........


i just miss ADOLF - H EVEN MORE NOW

 

[maithil]

Pakistan should avoid going to IMF or, its recommendations if high growth rates are to be sustained. However that would mean friends lending helping hands and in turn acquiring state assets.

 

[VCheng]

150 sounds like a nice number............

we will be bankrupt sooner /then later........


i just miss ADOLF - H EVEN MORE NOW

It is not a matter of bankruptcy, but rather a persistent slow decline into more and more poverty. This is what I said a few years ago:

As long as Pakistan consumes more than it produces, the long term trend for the PKR will remain approximately 10% devaluation annually. The present exchange rate is clearly unsustainable.

====================================================

Pakistan should avoid going to IMF or, its recommendations if high growth rates are to be sustained. However that would mean friends lending helping hands and in turn acquiring state assets.

Any foreign assistance, whether from IMF, or from friendly countries, will come with its own set of pros and cons. One hopes that the present government makes wise and sustainable beneficial decisions in the national interests, whatever they may be.

 

[Quwa]

Trade is done in foreign currencies, mostly USD. Because Pakistan is a net-importer, it will always consume more USD than it makes (via exports, overseas investments, etc).

So to sustain its imports, it'll need USD and, at this time, the USD (which plugs in the gap between our USD inflows and outflows) comes via loans. However, those loans must be repaid, and that too with interest, which then adds to our USD outflows.

The way out of the mess is to restrict imports and drive-up exports, but there are costly imports that the country needs (namely fuel). So investment must be done in raising the quality and value of our exports, which then feeds into socio-economic investments in education, technology growth, etc. The fruits of this won't be felt in 5 years or even 10-15 years, assuming its consistent.

One method is to set-up high tech manufacturing companies in Pakistan that are jointly owned by local and foreign (e.g. Chinese, Turkish, Western, etc) shareholders. You also get an influx of USD to stabilize the deficit.

You still need education funding and all, but this way, the work to push high-value exports might start sooner and, in time, the local investors could extend their capital towards new wholly local ventures. But there are a lot of 'ifs' that need to go right in that scenario.

 

[VCheng]

Trade is done in foreign currencies, mostly USD. Because Pakistan is a net-importer, it will always consume more USD than it makes (via exports, overseas investments, etc).

So to sustain its imports, it'll need USD and, at this time, the USD (which plugs in the gap between our USD inflows and outflows) comes via loans. However, those loans must be repaid, and that too with interest, which then adds to our USD outflows.

The way out of the mess is to restrict imports and drive-up exports, but there are costly imports that the country needs (namely fuel). So investment must be done in raising the quality and value of our exports, which then feeds into socio-economic investments in education, technology growth, etc. The fruits of this won't be felt in 5 years or even 10-15 years, assuming its consistent.

One method is to set-up high tech manufacturing companies in Pakistan that are jointly owned by local and foreign (e.g. Chinese, Turkish, Western, etc) shareholders. You also get an influx of USD to stabilize the deficit.

You still need education funding and all, but this way, the work to push high-value exports might start sooner and, in time, the local investors could extend their capital towards new wholly local ventures. But there are a lot of 'ifs' that need to go right in that scenario.

As concluded by a PDF TTA recently in another thread:

Last five years' policies were built on premise that improving growth rate will attract FDI. But a country with security-obsessed policies can not be an investment destination because people who make and enact such policies exist in a comfortable cocoon, unconcerned with the sweat, toil, & tears required to produce economic growth. It is the common people who must pay for both the cost of said policies and the privileges that sustain the policy makers' follies.

Until and unless Pakistan is capable of making fundamental changes in its policies, such economic decline is likely to continue.

 

[Syed1.]

I hope we don't go to the IMF. Raise the tax to maximum possible but don't go to IMF since last twelve programmes have shown that IMF programmes never help.


In Pakistan if a person has salary of Rs 200,000 he only pays tax of Rs. 5000. This is only a tax rate of 2.5%. As per this website: http://taxcalculator.pk/


This is daylight robbery. Everybody should pay minimum 10-15% tax on their incomes. To give you a perspective, my annual tax rate in Canada is 35% and I fall in the median for my income group. On top of that there is a 14% tax on anything and everything I purchase. You need this much tax to provide clean roads, free healthcare, education and other services.

2.5% tax rate is a joke. Pakistanis do not want to pay tax but want their country to magically become a first world country.

 

[Chak Bamu]

I hope we don't go to the IMF. Raise the tax to maximum possible but don't go to IMF since last twelve programmes have shown that IMF programmes never help.
.
.
.
.
2.5% tax rate is a joke. Pakistanis do not want to pay tax but want their country to magically become a first world country.

You just cherry-picked figures to make a non-existent point and mixed two different things in the process. Higher tax collection will not help with balance of payments situation which is the primary driver of rupee depreciation.

Pakistan must go to IMF. There is no choice. Anyone who suggests that Pakistan has a choice does not know much about Pakistan's economy, or economics in general. When you say that IMF programs never help, can you demonstrate that Pakistan actually defaulted on its obligations in the last 70 years? Pakistan has been close to default a number of times and each time IMF was asked to provide loans to avert a default. IMF has actually helped Pakistan avoid default. How can that be a bad thing?

The problem does not lie in giving middle class a tax break, the problem lies in Pakistan's economy being in the position where no one wants to invest in it, except China. If you were to think on this one point, you may find the root of the problem.

Anyways, just convert Rs 200,000 into Canadian dollars and tell me if you can support a family in the amount. Do factor in school fees for 2 kids, which Canadians do not have to pay directly, I assume. Many other services are not available free to Pakistanis and must be purchased (health, security, justice, just to name a few). The middle class tax break was meant to help with economic growth by increasing disposable income, not make cheaters out of tax payers. I suggest you stick with Canadian issues, which you might be in a better position to address. Leave Pakistan's economic issues to those who actually know a thing or two and pay a good bit in taxes, both direct and indirect.

 

[Syed1.]

You just cherry-picked figures to make a non-existent point and mixed two different things in the process. Higher tax collection will not help with balance of payments situation which is the primary driver of rupee depreciation.

Pakistan must go to IMF. There is no choice. Anyone who suggests that Pakistan has a choice does not know much about Pakistan's economy, or economics in general. When you say that IMF programs never help, can you demonstrate that Pakistan actually defaulted on its obligations in the last 70 years? Pakistan has been close to default a number of times and each time IMF was asked to provide loans to avert a default. IMF has actually helped Pakistan avoid default. How can that be a bad thing?

The problem does not lie in giving middle class a tax break, the problem lies in Pakistan's economy being in the position where no one wants to invest in it, except China. If you were to think on this one point, you may find the root of the problem.

Anyways, just convert Rs 200,000 into Canadian dollars and tell me if you can support a family in the amount. Do factor in school fees for 2 kids, which Canadians do not have to pay directly, I assume. Many other services are not available free to Pakistanis and must be purchased (health, security, justice, just to name a few). The middle class tax break was meant to help with economic growth by increasing disposable income, not make cheaters out of tax payers. I suggest you stick with Canadian issues, which you might be in a better position to address. Leave Pakistan's economic issues to those who actually know a thing or two and pay a good bit in taxes, both direct and indirect.

First of all for a Noora donkey eater you are better than the other paindus at putting your thoughts to words so congratulations for that.


Secondly had you actually had a brain and weren't a typical Noora donkey eater you would have known that I wasn't comparing purchasing power of each currency and how far one ruppee takes you in Pakistan or one dollar takes you in Canada, I was just comparing tax paid on a nominal income of Rs. 200,000 alot of the salaried class earn less than this in Pakistan. Heck a new graduate engineer would be lucky to start at Rs. 50 - 60k.


Since you being a donkey eating Noora you are perhaps living on haram money haven't paid a ruppee of tax in your life so you probably think paying Rs. 5000 tax on a monthly income of Rs 200,000 is a massive amount. I suggest you put that donkey boti down and eat some badam because your lack of mental capacity is showing.


Finally you said just because Pakistan has not been able to default on an IMF plan therefore going to IMF is not a bad thing. Again showing your donkey eating Noora-ism. Child maybe before trying to explain economics to your father aka me, learn how detrimental going to IMF is for any economy in the long run.

 

[Chak Bamu]

First of all for a Noora donkey eater you are better than the other paindus at putting your thoughts to words so congratulations for that.


Secondly had you actually had a brain and weren't a typical Noora donkey eater you would have known that I wasn't comparing purchasing power of each currency and how far one ruppee takes you in Pakistan or one dollar takes you in Canada, I was just comparing tax paid on a nominal income of Rs. 200,000 alot of the salaried class earn less than this in Pakistan. Heck a new graduate engineer would be lucky to start at Rs. 50 - 60k.


Since you being a donkey eating Noora you are perhaps living on haram money haven't paid a ruppee of tax in your life so you probably think paying Rs. 5000 tax on a monthly income of Rs 200,000 is a massive amount. I suggest you put that donkey boti down and eat some badam because your lack of mental capacity is showing.


Finally you said just because Pakistan has not been able to default on an IMF plan therefore going to IMF is not a bad thing. Again showing your donkey eating Noora-ism. Child maybe before trying to explain economics to your father aka me, learn how detrimental going to IMF is for any economy in the long run.

Your language shows that you have no argument to support your contentions.

But here, I will tear apart your contentions to show how very superficial and idiotic are your views.

1. You came up with a random figure and when I questioned the wisdom of your having done so, you could only huff and puff and use abusive language. That fact that you picked up a figure of Rs. 200,000 can either mean that you earn that much in Canada (would explain the desperate abuse), or that you know absolutely nothing. You did not address any of my points that pertained to this figure. You did not defend your choice of this figure with any facts or figures. Giving tax breaks to middle-class is a legitimate economic measure for spurring growth. But you do not have the patience to ponder on this point. Pakistanis pay a lot of indirect taxes and have to pay for social services that the government does not provide. But all this is just gibberish for you because you do not have the patience or intelligence to understand this.

2. You have gone on another tangent about new engineering graduates making less than Rs. 50K - 60K (the actual figure is around Rs. 40K) and it is anybody's guess why you came up with this when it directly contradicts your point. Who in their right mind would want poorly paid fresh graduates (who are lucky to have a job at all) to pay high taxes? You are just the sort of person who can argue both sides of a point and blame the bewildered audience for not understanding your views.

3. You have also asserted in your abuse laced tirade that I do not pay any taxes or that I grew up consuming haram. How would YOU know that? Constructing straw-men does not make a valid argument. It just shows that you are desperate to make a point that does not actually exist. Since you seem to be quite dim and scatter-brained, I suspect that you did not do much in the way of paying taxes in Pakistan while you disgraced it with your puerile & foul-mouthed presence. This of course is just a guess, and you could correct my impression by posting pictures of tax receipts.

4. You did not directly address my assertion that IMF helped Pakistan avert loan defaults, and instead again asserted that going to IMF is a bad thing, I would like you to establish three points that you seem to make:

A) By helping avert loan defaults, IMF did Pakistan a disservice.
B) Going to IMF is detrimental for any country without exception. I would like you to address how it was such a bad thing for Turkey, for example.
C) Pakistan has viable options other than IMF.

I will wait for your response. But what ever response you make, I will address it tomorrow. I must sleep now because I just came back from a 14 hour work day that included a trip to Sialkot. One has to earn one's salary, after all.

 

[BATMAN]

Pakistan need to stop smuggling and money laundering.
Clearly Imran Khan is not interested in either!

 

[SoulSpokesman]

@VCheng

Syed Ali Haider sb,

PKR will settle around 150 per USD in about two years,and then remain steady for the rest of the term of this government if they implement good policies.

And God forbid sir, what if they dont?

@BATMAN

Batman sb,

Pakistan need to stop smuggling and money laundering. Clearly Imran Khan is not interested in either!

That was a bit ambiguous, sir. What do you imply? That IK is not interested in smuggling and money laundering? Or not interested in stopping both?

Regards

 

[shah_123]

I hope we don't go to the IMF. Raise the tax to maximum possible but don't go to IMF since last twelve programmes have shown that IMF programmes never help.


In Pakistan if a person has salary of Rs 200,000 he only pays tax of Rs. 5000. This is only a tax rate of 2.5%. As per this website: http://taxcalculator.pk/


This is daylight robbery. Everybody should pay minimum 10-15% tax on their incomes. To give you a perspective, my annual tax rate in Canada is 35% and I fall in the median for my income group. On top of that there is a 14% tax on anything and everything I purchase. You need this much tax to provide clean roads, free healthcare, education and other services.

2.5% tax rate is a joke. Pakistanis do not want to pay tax but want their country to magically become a first world country.

I hope we don't go to the IMF. Raise the tax to maximum possible but don't go to IMF since last twelve programmes have shown that IMF programmes never help.


In Pakistan if a person has salary of Rs 200,000 he only pays tax of Rs. 5000. This is only a tax rate of 2.5%. As per this website: http://taxcalculator.pk/


This is daylight robbery. Everybody should pay minimum 10-15% tax on their incomes. To give you a perspective, my annual tax rate in Canada is 35% and I fall in the median for my income group. On top of that there is a 14% tax on anything and everything I purchase. You need this much tax to provide clean roads, free healthcare, education and other services.

2.5% tax rate is a joke. Pakistanis do not want to pay tax but want their country to magically become a first world country.

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