EDITORIAL: A Finance Minister Muhammad Aurangzeb-led economic team has arrived in Washington DC to attend the annual Spring World Bank/International Monetary Fund meeting scheduled from 15 to 20 April.
The website of the two multilaterals defines the spring meeting of the Board of Governors (Pakistan’s representative to the Board is the Governor State Bank of Pakistan) as bringing “together central bankers, ministers of finance and development, parliamentarians, private sector executives, representatives from civil society organisations and academics to discuss issues of global concern, including the world economic outlook, poverty eradication, economic development, and aid effectiveness.
Also featured are seminars, regional briefings, press conferences, and many other events focused on the global economy, international development, and the world’s financial system.“
Thus while the spring meetings are more focused on global as opposed to country specific issues yet given that the next programme loan is extremely critical for Pakistan’s economy with our foreign exchange reserves largely borrowed, growth rate scaled to under 2 percent, a consumer price index of 27.06 percent July-March 2023-24, and all bilateral assistance linked to being on a Fund programme since 2019, the economy needs the comfort level that comes with being on a rigidly monitored Fund programme as soon as possible.
Prime Minister Shehbaz Sharif and Finance Minister Aurangzeb are both on record as stating that during the spring meeting discussions on the features of the new bail-out programme will be held.
The last tranche of the ongoing Stand-By Arrangement (SBA) is pending Board approval scheduled for the end of the current month, considered a formality as the staff-level agreement was reached on 20th March.
This is supported by a statement made by Managing Director of the IMF, Kristalina Georgieva, while addressing the Atlantic Council think tank this Thursday past, that Pakistan was successfully completing the SBA and the “economy was performing somewhat better with reserves building up” and that there is a “commitment to continue on this path, and the country is turning to the Fund for potentially having a follow-up programme.”
However, she warned that “there are very important issues to be solved in Pakistan: the tax base, how the richer part of society contributes to the economy, the way public spending is being directed and of course, creating … a more transparent environment”.
The Federal Board of Revenue (FBR) backed by the newly-elected government has begun the politically challenging process of widening the tax base specifically through bringing the traders into the tax net as well as linking all available data bases, particularly the information available with National Database and Registration Authority (Nadra), with FBR with the objective of ensuring that the richer members of society contribute to the economy.
However, Georgieva also mentioned the issue of the way public spending is being directed and there is little evidence of any change in this aspect of the budget.
The government must undertake three major measures to increase leverage with the Fund to implement its conditions in a more phased manner that would require (i) not diverting the increase in revenue through widening the tax net to raising current non-development inflation fuelling expenditure; (ii) implementing pension reforms for the government and public sector employees that envisage some contribution by the employees like in other countries; and (iii) pass a bill limiting domestic borrowing with any excess borrowing subject to punitive measures against the sitting government as in recent years this has been a major source of inflation, other than the administrative measures supported by the Fund and other multilaterals.
While Pakistan has adhered to the letter and spirit of the SBA agreement which prompted the IMF chief to make a supportive statement recently, yet the fact of the matter is that the burden of taxes is still being mainly borne by the relatively poorer sections as indirect taxes continue to account for around 70 to 75 percent of all tax collections and this does not include the petroleum levy that is in the sales tax mode itemised as other taxes to avoid sharing with the provinces.
In addition, there has been no attempt to either devolve the subjects to provinces as agreed under the 18th Constitutional Amendment, which could save the federal exchequer a little under a trillion rupees, nor to get the provinces to ensure that the richer part of their society makes their contribution to the provincial economy, particularly the rich farmers and real estate players.
Granted that the scale of reforms with respect to the debit and credit side of the budget is mind boggling, yet the process needs to be initiated now so that there is some leverage with the Fund going forward into the next programme with the objective of minimising the negative impact on the poor and vulnerable.
Copyright Business Recorder, 2024
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