EDITORIAL: On 24 March 2021, the International Monetary Fund (IMF) Board approved the staff-level agreement on second to the fifth review reached with Pakistani authorities on 16 February 2021 with disbursement of 500 million dollars. One revision on the IMF website needs to be highlighted: the Gross Domestic Product (GDP) growth rate has been revised upward from negative 0.4 percent in 2019-20 to one percent while the growth rate for the current year remained at 1.5 percent (against the State Bank of Pakistan’s recent claim of 3 percent growth rate) with negative implications on tax collections and a consequent rise in borrowing needs.
A look at what has been highlighted in the IMF press release is mirrored in recent media reports: (i) the Fund notes that reaching fiscal 2022 fiscal targets (projected at 4.9 trillion rupees for the current year) rests on the reform of both general sales and personal income taxation. Recent media reports indicate the withdrawal of exemptions estimated rather optimistically at between 70 and 140 billion rupees (with independent tax experts as well as tax officials placing the figure at a more modest 20 to 30 billion rupees) as well as withdrawal of around 40 withholding taxes in the sales tax mode in the budget 2021-22 and a widening of the tax net with a more aggressive audit for next fiscal year - a policy repeatedly supported but remaining unimplemented; (ii) the Fund urges vigorously following through with the updated IFI supported circular debt management plan and enactment of the Nepra Act amendments (the relevant standing committee recently approved allowing the government to impose a surcharge of up to 10 percent on tariffs) which the Fund reckons would help restore financial viability through management improvements, cost reductions, regular tariff adjustments; the debt retirement plan has been reported in the media in detail; (iii) protecting social spending and boosting social safety nets remain vital to mitigate costs and garner broader support for reform…better targeting of subsidies. This aspect is being vigorously supported by the Prime Minister himself; however, the amount of 208 billion rupees earmarked for disbursement to the vulnerable is not sufficient to take account of the rising number of unemployed grappling with the erosion of their income due to the ongoing contractionary fiscal and monetary policies notwithstanding their easing to some extent to deal with the pandemic, the onslaught of the third wave of the pandemic itself, and last but not least the sustained double-digit food inflation; in this context, it is relevant to note that the subsidies cell has estimated total subsidies at over 2 trillion rupees most of which are untargeted; (iv) entrenching stable and low inflation requires a data-driven approach for future policy rate actions – data-driven is likely to reveal that the consumer price index (CPI) is not responsive to discount rate adjustment though core inflation components are (non-food, non-energy) – and thankfully nearly two years after the IMF programme was launched a much-needed realignment of the discount rate to core instead of CPI as evident in the most recent monetary policy statement; and last but not least the mafia-fuelled inflation requires engagement and not simply hurling accusations and threats; (v) completing the much advanced action plan on AML/CFT is essential. The recent media reports on the real estate sector required to provide details of the buyer maybe seen within this context. In other words, the government must implement the remaining clauses of the Financial Action Task Force actions; and (vi) efficiency in the vast state-owned entity (SOE) sector. Here too the government has begun work and with retrenchments ongoing in the Pakistan Steel Mills, a highly unpopular political decision the government has gone some way in meeting the Fund’s conditions.
Business Recorder fully supports the need for reforms in all the areas/sectors identified by the IMF. The tax structure is unfair, inequitable and anomalous and unfortunately all claims that the Federal Board of Revenue’s performance has improved in widening the tax net are not supported even though the number of filers has risen dramatically yet collections from personal income tax have not risen commensurately or significantly, this in turn has implied higher withholding taxes in the sales tax mode with direct implications on inflation (for example, the heavy reliance on petroleum levy – from 260 billion rupees last year to 450 billion rupees this year), and the prospect of privatisation and/or downsizing SOEs has generated considerable concern amongst the staff of these entities. The power sector continues to be poorly managed and the government’s reliance on raising tariffs to meet its poor performance is a policy reminiscent of previous administrations with the pain borne by the consumers.
The IMF notes that the policy mix has been recalibrated to strike an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms while maintaining social cohesion yet the recent harsh decisions by the government have not been well received by the general public and there is a growing clamour for relief through a raise in salaries and/or higher subsidies which no doubt prompted the government to raise the Ramazan subsidy from the budgeted 2 billion to 7.8 billion rupees. While details of the recalibrated time-bound performance criteria will be uploaded on the IMF website soon but it is clear that the burden of reforms on the general public to date has been significant and it is unclear how much additional burden the citizenry would be able to bear before there are spontaneous expressions of discontent.
However, there is another IMF press release dated 24 March that is very disturbing in which it “claims new information that came to the authorities’ attention, and which was shared with Fund staff, has revealed that the data on government guarantees dating back to FY2016 was reported inaccurately. The revised data indicates a non-observance of the [Performance Criteria] PC on government guarantees at end-September 2019 by a margin of PRs 357 billion (about 0.9 percent of GDP), which resulted in a non-complying purchase and a breach of obligations under Article VIII, Section 5 of the IMF Articles of Agreement. The authorities previously reported that the PC had been met with a margin of PRs 55 billion (0.1 percent of GDP) at end-September 2019.” In September 2016, Pakistan had just completed the IMF programme and hence the reference to Article VIII.
While critics of the Minister of Finance Dr Hafeez Sheikh may challenge his placing the entire blame on the previous administration, a charge made repeatedly by the Prime Minister himself, yet what is relevant to note is the insinuation that during the relevant period sovereign guarantees were extended for the China Pakistan Economic Corridor (CPEC) projects as well, but why would they not be part and parcel of the annual statement in budget 2020-21 document is beyond reason. The document refers to total contingent liabilities at 1.89 trillion rupees – 1.412 trillion rupees domestic with the largest attributed to the power sector at 1.1 trillion rupees which has risen considerably since. This did not include commodity operations which amounted to 649.3 billion rupees as at the end of March 2020. As per the Fiscal Responsibility and Debt Limitation Act, the government is barred from extending guarantees of over 2 percent of GDP which the government has clearly exceeded.
The Fund notes that further efforts to remove structural impediments will strengthen economic productivity, confidence and private sector investment. True; but with the government crowding out private sector borrowing through a massive increase in domestic borrowing by 44 percent – from 16.5 trillion rupees to 23.7 trillion rupees by September 2020, confidence remains at a low ebb and announced incentives are being withdrawn. And urges to bolster the governance, transparency and efficiency of the vast SOE sector, boost business sentiment and job creation and strengthen the effectiveness of anti-corruption institutions. Good suggestions all but in spite of detailed recommendations by more than 40 task forces set up by the Prime Minister two and half years ago they remain unimplemented.
Copyright Business Recorder, 2021
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