Talks with IMF

EDITORIAL: The ongoing negotiations with the International Monetary Fund (IMF) are, without doubt, stalled due to the failure of the government to implement the agreed conditions with respect to two sectors that have been performing poorly for decades: the power and the tax sectors. In this context, it is relevant to note that in the previous 22 IMF programmes extended to Pakistan, the State Bank of Pakistan (SBP) has invariably implemented the agreed reforms in letter and, in the initial stages of a programme in spirit as well, which have included extending zero borrowing to the government, a tighter monetary policy to tackle inflationary pressures and ensuring that the rupee value remains within certain defined parameters in an effort to minimize the negative impact of disorderly market conditions. It is, however, the government’s financial team responsible for the fiscal side that has consistently been unable to meet the agreed reforms time and again mainly because of resistance by the influential pressure groups operating in these sectors. This has accounted for the Ministry of Finance feeling compelled to browbeat the SBP to take measures that compromise its pledges to the Fund – a trend that accounts for the persistence of the Fund staff to insist on greater SBP autonomy.

Prime Minister Imran Khan in a recent interaction with the media noted that to his knowledge only power sector reforms are an irritant in the successful completion of the negotiations – reforms that no doubt included: (i) raising tariffs by 1.95 rupees per unit announced on 20 January 2021 by Umar Ayub, the Minister for Energy, with another 1.6 rupee per unit raise under consideration by the regulator under fuel adjustment charges; and (ii) a raise in petroleum and its products effective 15 January 2021 with a commensurate rise in petroleum levy budgeted to account for 8 percent of total tax revenue for the current year. It is important to note that this levy is not a component of the divisible pool and therefore credited entirely to the federal government treasury. However, these decisions with massive negative implication on the rate of inflation, which is currently at 8 percent, have yet to satisfy the IMF staff team or else an agreement would have been reached by now. Reports indicate that the Fund is insisting on: (i) measures to combat the rise in circular debt – that has risen from 1.2 trillion rupees inherited by the Khan administration to over 2.3 trillion rupees today, reflecting an appalling performance; (ii) the success in reaching an agreement with Independent Power Producers (IPPs), looking at changing the existing costly fuel mix and setting up an electricity market maybe steps in the right direction but it is unlikely to impress the Fund and contribute to an agreement with the Fund when recovery remains low which is being met with high subsidies.

The Federal Board of Revenue data reveals that 2.19 trillion rupees was collected in July-December 2020-21 or the first half of the ongoing fiscal year against the target of 2.2 trillion rupees with a shortfall of only 15 billion rupees, and against the collection of 2.094 trillion rupees in the comparable period of the year before. The Ministry of Finance uploaded its monthly economic update and outlook in January 2021 in which it claimed revenue rise of 22.2 percent (July-November 2020) against the same period of last year; however, the bulk of this rise is attributed to non-tax revenue growth of 17.7 percent – a claim that is baffling given that the government budgeted a decline under this head of 187 billion rupees. The government did not respond to what items of non-tax revenue witnessed a raise especially given the pandemic.

It has been reported that the finance ministry has consistently maintained that privatization proceeds as well as a rise in non-tax revenue may cover any shortfall in meeting the tax targets and/or a reduction in expenditure. What it has conveniently ignored is the rise in borrowing – domestic debt has risen from 16.4 trillion rupees in 2018 to 23.9 trillion rupees by October 2020 - a rise of a historically high 7.5 trillion rupees or 46 percent in just two years. Gross foreign debt rose from 96 billion dollars on 30 September 2018 to 113.8 billion dollars on 30 September 2020 - a total raise of 17.8 billion dollars or a rise of nearly 19 percent in just two years. The PML-N government inherited gross foreign debt of 60.89 billion dollars in June 2013 and raised it to 96 billion dollars by end 2018 – 35.11 billion dollars rise or a raise of 58 percent but in five years – to bequeath it to the incumbent PTI government. Thus there is legitimate concern that if the pace of the rise in borrowing is maintained then it would far outpace any previous administration at the end of five years. It is these statistics that suggest the need for an urgent revisit of the conditions agreed with the Fund as they have begun to haunt the Khan administration because their political implications manifest themselves on the party as is evident from frequent challenges to the government’s economic narrative by the party’s parliamentarians.

Copyright Business Recorder, 2021