EDITORIAL: The ongoing talks with the International Monetary Fund (IMF) on the second mandatory review under the 6 billion dollar Extended Fund Facility (EFF), a prerequisite for approval to disburse the next tranche, are reportedly log-jammed due to the Fund’s insistence on implementing the politically challenging reforms agreed in July 2019 (pre-pandemic) with the government requesting a more phased approach given the arrival of second wave of the pandemic in the country. In March this year, the IMF team ceased to focus on the agreed EFF conditions and instead focused on assisting Pakistan deal with the pandemic in a meaningful manner. However, with the pandemic’s second wave in Pakistan it is not unreasonable for the government to request the Fund to take the emerging situation under advisement.
While holding no brief for the government’s acceptance of the upfront extremely harsh conditions that accounted for contractionary monetary and fiscal policies that stifled growth and fuelled unemployment, yet, with the much worse second wave of the pandemic there is a need for the Fund and the government to renegotiate sequencing and implementation period of the reforms.
The Fund is reportedly insisting on implementation of reforms in two poorly performing sectors of the economy; notably, the energy and the tax sectors. Granted that the performance of these two sectors is not only associated with the incumbent government but can be sourced back to more than a couple of decades; however, one can hold the Khan administration responsible for not taking appropriate measures to improve performance of either sector and thereby compound the problem.
The energy sector’s circular debt has risen from 1.2 trillion rupees (inherited by the present government in August 2018) to 2.3 trillion rupees today – an unprecedented rise of nearly 92 percent in two years and three months, reflecting a worsening trend in the sector’s performance. The rise in circular debt is indicative of a range of poorly performing subsectors – from rising receivables from government and private sector consumers to high distribution and transmission losses. It is important to note that the federal government succeeded in signing Memoranda of understanding (MoUs) with the Independent Power Producers (IPPs) who had been receiving excessive financial incentives at the cost of the hapless consumers but with the condition that the government first clears the entire 400 billion rupees of dues, thereby triggering the conversion of the non-binding MoUs into binding contracts. Recent reports not denied by government sources indicate that the government is now offering repayment of the 400 billion rupees in three installments over three years which the IPPs have rejected. The reason for the phasing out of repayment of dues is attributed to the ongoing negotiations with the IMF.
In this context, it is relevant to note that the IMF concern is no doubt due to the fact that the repayment of the entire amount in the current fiscal year would generate a budget deficit with obvious negative implications on inflation. However, one would hope that the IPPs face upto this reality in their position. The government is reducing its budgeted current expenditure on (i) running of civilian government (which in spite of a pay freeze was budgeted with a 6.7 percent increase – from 445.8 billion rupees in the revised estimates of last year to 475.7 billion rupees in the current year); (ii) desist from incurring domestic loans whose markup this year is estimated at 2.6 trillion rupees with 2.374 trillion rupees in last year’s revised estimates - a rise of 11 percent; and (iii) a rise in foreign debt equity through issuing sukuk/Eurobonds at 7 percent, well above the international rate. At the same time one would hope that the IMF no longer insists on full cost recovery, an objective which governments, including the Khan administration, have tried to meet by raising tariffs rather than in implementing reforms and improving governance.
Like the energy sector myriad issues confounding the tax sector as well as measures to deal with them have long been identified. However, here too, successive governments have consistently failed to implement reforms that would bring those outside the tax net in spite of being high net worth individuals into the net. The focus of the government remains on revenue and on ease of collection like its predecessors which accounts for rising reliance on withholding agents to increase revenue.
There appears to be a lack of clarity in reform agenda. This newspaper is, therefore, of the opinion that both the government of Pakistan and the IMF are required to delineate a new approach to the reform agenda that appropriately appreciates the economic conditions obtaining in the country in the midst of Covid-19 outbreak.
Copyright Business Recorder, 2020