Ms. Maria Teresa Daban Sanchez – Resident Representative of IMF in Pakistan

Pakistan is what we usually call a high-profile case. It will be demanding, but also very rewarding and interesting from both professional and personal points of views

EVOLVE: How do you look back at yourprofessional journey?

Ms. Maria Daban: I am very excited about the opportunity to work as Resident Representative of the International Monetary Fund (IMF) to Pakistan. For a macroeconomist, working for an organization such as the IMF, and having
an assignment such as Pakistan is a dream job. Pakistan is a large emerging market economy, with a special geopolitical relevance, a very interesting history and cultural heritage, and difficult macroeconomic challenges. In other words, Pakistan is what we usually call a high-profile case. It will be demanding, but also very rewarding and interesting from both professional and personal points of views.

The main risk for Pakistan on the external front is the ongoing fast widening of the current account deficit

EVOLVE: How would you define your missionstatement after you took charge as ResidentRepresentative of IMF to Pakistan?

Ms. Maria Daban: Pakistan has a long and fruitful, yet complex, relationship with the IMF. For years, we have worked together with Pakistan on several issues, through financial assistance, policy advice and technical assistance.
In the last few years, despite having an active IMF-supported program with Pakistan, the IMF visibility was hampered because of security concerns. For instance, during several years missions from our headquarters in Washington did not visit Pakistan. All discussions were conducted in Dubai. Reflecting a noticeable improvement in Pakistans security situation, IMF missions have now started coming to Pakistan again. One of my goals would be to strengthen the engagement of the IMF with Pakistan and make it more visible and approachable, by reaching out as many segments as possible of the Pakistani society.

EVOLVE: Pakistan is seen as a bright spotin the global economy. How do you see theeconomys performance and what is yourassessment of the current governments performanceand its reforms record?

Ms. Maria Daban: Pakistans cyclical position remains broadly favorable, with real GDP growth projected to strengthen to 5.6 percent this fiscal year on the back of stepped-up China- Pakistan Economic Corridor investments,
better energy availability, and strong consumption growth. However, this outlook is at risk as macroeconomic resilience has been eroding: fiscal position has weakened, the current account deficit has quickly widened, foreign
exchange reserves have declined, and arrears in the power sector have begun to accumulate. Strong policy efforts are needed to address these slippages and strengthen Pakistans economic resilience.

EVOLVE: What are risks on the externalfront for Pakistan and what is your insightand assessment on regional and global economicsituation? Especially the key riskfactors

Ms. Maria Daban: The main risk for Pakistan on the external front is the ongoing fast widening of the current account deficit. Recent moves

Pakistans cyclical position remains broadly favorable, with real GDP growth projected to strengthen
to 5.6 percent this fiscal year on the back of stepped-up CPEC investments, better energy availability, and
strong consumption growth

to allow for some exchange rate adjustment, and tighten monetary policy are welcome nearterm steps. However, there is a need to complement these efforts with: (i) more sustained exchange rate flexibility and the phasing out
of foreign exchange interventions; (ii) tighter monetary policy; (iii) strong fiscal discipline; and (iv) decisive efforts to contain losses in public enterprises. In addition, reviving structural reforms will be key to more sustainable and inclusive medium-term growth. Key priorities include to continue advancing the energy sector reform and competitiveness enhancingimprovements in the business climate, enhance central bank independence, generate more tax revenue through better compliance, and ending recurring losses in public enterprises.

EVOLVE: Do you think that there shouldbe more coordination between global monetaryauthorities to prevent shocks? Howthis coordination can be framed?

Ms. Maria Daban: The global crisis of 2008- 09 showed that countries are interconnected through strong and diverse linkages. It also showed that financial markets and economic activity are vulnerable to a sharp tightening of
financial conditions, a sudden change in expectations, and many other various shocks including geopolitical events or a wider escalation of

For emerging market economies (EME), such as Pakistan, it is quite common to tape foreign borrowing to finance their development process. This is because these young economies are not yet able to generate by themselves the savings needed to finance their developmental needs

protectionist measures. The crisis also showed that multilateral cooperation was critical to craft an effective response, while preserving the current open trading system and strengthening financial integration. One effective way of framing this coordination is through existing international and regional financial organizations, such as the IMF, WB, WTO, OECD, ADB, and others alike.

EVOLVE: Bloomberg claims that devaluationdrags Pakistani Rupee to bottom ofcurrencies but IMF says that devaluationof Pakistani rupee is helpful for economicgrowth. Can you make us understand?

Ms. Maria Daban: For a country to remain competitive, it is important to have an exchange rate that is aligned with market forces and the economys fundamentals. For instance, if the exchange rate is overvalued, i.e. a low value of local currency by US dollar, foreign buyers will not find it attractive to buy the local products. In other words, exporting is very difficult when the exchange rate is overvalued. Also, because the local currency is overvalued, consumers will find it more attractive to buy foreign products instead of buying domestic production. This may lead to the de-industrialization of the country. In the case of Pakistan, in situations when the rupee has been overvalued, currency depreciation has been helpful in boosting exports and protecting local industry. In these cases, depreciation of the rupee has helped to romote growth.

EVOLVE: Estimated, during the past yearsthe current government has taken $25 billionin foreign loans. Out of the $25 billion,$11.95 billion was used to pay off otherloans. What sort of economy is runningaround?

Ms. Maria Daban: For emerging market economies (EME), such as Pakistan, it is quite common to tape foreign borrowing to finance their development process. This is because these young economies are not yet able to generate
by themselves the savings needed to finance their developmental needs. To serve this foreign borrowing, EME need to roll over part of their outstanding borrowing. This is part of their debt management strategy. So, the important
issue is not whether EME should or should not borrow, but whether the level of foreign borrowing is sustainable and what are the terms and maturity. In Pakistan, the level of foreign debt (public and private) is still relative low, at 31 percent of GDP, when compared to the average for EME and most of it is in concessional terms. However, the concern in Pakistan is how this volume of external debt compared to the volume of exports. It is imperative that foreign borrowing in Pakistan contributes to fund productive investment, improve external competitiveness and promote exports.

EVOLVE: What is your advice to the governmentsregarding governance style? Whatin your opinion should be the ratio of governmentspending and especially the improvementof the quality of public finances?

Ms. Maria Daban: Pakistans public debt has reached about 70 percent of GDP, reflecting elevated fiscal deficits. Over the medium term, public debt is expected to hover around 70 percent of GDP with gross financing needs

The priority at present is to address Pakistans ongoing erosion in macroeconomic resilience (declining reserves and rising fiscal deficit). This would require adequately tight fiscal and monetary policies

projected to exceed 30 percent of GDP. This underscores the need to resume fiscal consolidation, improve public debt sustainability, and build sufficient fiscal buffers. This is critical to strengthen economic resilience, safeguard
fiscal sustainability, and limit pressures on the current account and international reserves. To this end, it is imperative Pakistan steps up its efforts in mobilizing additional tax revenues by broadening the tax base and strengthening tax administration; and enhancing the composition of public spending by containing the wage bills
growth, further reducing electricity subsidies, and increasing priority social spending (e.g. education, health, social safety net). In addition, it would be advisable strengthening the national fiscal federalism framework and public debt
management.

EVOLVE: Unemployment has been a majorproblem in Pakistan since long. Has IMFever emphasized or assisted Pakistans governmentto create jobs?

Ms. Maria Daban: Every year, estimations are that more than two million young people enter the job market in Pakistan. This could be a tremendous opportunity for growth. But it also presents challenges. How could Pakistan
absorb so many new job seekers? One way is through promoting private investment, which in Pakistan accounts for only 10 percent of GDP, while emerging markets averages is 17 percent. Another complementary way is through boosting Pakistans exports, which accounts for only 5 percent of GDP while emerging markets exports are nearly four times as high. Pakistan could do better. To that end the last IMF-supported program focused on measures to improve the business climate, restructuring/privatizing public enterprises, advancing energy reforms, broadening the tax base and increasing fiscal revenues to create space for growth-supporting expenditures, such as education and infrastructures.

EVOLVE: In your opinion where is theproblem in Pakistans tax system? How canit be reformed?

Ms. Maria Daban: One of the most important macroeconomic challenges in Pakistan is the low level of tax collections (12.5 percent of GDP). This is the result of existing narrow tax bases, the extensive use of tax exemptions,
large informal economy, as well as weaknesses in revenue administration. In recent years some progress has been achieved in enhancing databases,

It is imperative that foreign borrowing in Pakistan contributes to fund productive investment, improve
external competitiveness and promote exports

automatizing some processes, and improving the facilities and resources of the Federal Board of Revenue (FBR). However, major flaws remain including the complexity and arbitrariness of tax legislation and procedures, the
adversarial relationship between the taxpayers and the FBR, and poor skills and capabilities. Thus, tax compliance is very low, and collections are enforced through onerous withholding schemes and auditing. These problems are aggravated by current fiscal decentralization arrangements, according to which the federal government must devolve almost 60 percent of total tax revenue to provinces, while provinces have limited capacity and incentives to conduct proper revenue mobilization. Reforms should focus on simplifying current legislation and procedures, reducing reliance on withholding taxes, establishing an effective dispute resolution/consultation mechanism, and strengthening FBRs and provincial revenue authorities human resources.

EVOLVE: Any message for the readers ofEVOLVE.

Ms. Maria Daban: With an export-oriented manufacturing sector, a large domestic market, a privileged geographic situation, access to international financial markets and extensive donor support, Pakistan has the potential to become a full-fledged emerging market economy. But to unleash that potential, there is a need to implement good policies in the short and medium term. The priority at present is to address Pakistans ongoing erosion in macroeconomic resilience (declining reserves and rising fiscal deficit). This would require adequately tight
fiscal and monetary policies, which should be complemented with greater exchange rate flexibility. At the same time, there is a need to generate conditions for sustained, strong growth and private investment by removing current obstacles to growth. These obstacles include relative high production costs (e.g. electricity), falling productivity growth, poor business climate, a challenging security situation, and periodic setbacks to macroeconomic manage

ment. Removing these obstacles will take time. A strong commitment and consensus will be needed to make headway.