EDITORIAL: The statement by the Resident Representative of the International Monetary Fund (IMF) in Islamabad on 23 August, a week after the caretaker cabinet took oath, reminding the government of its pledge to keep all state-owned entities (SOEs) under finance ministry’s oversight indicates that the Fund staff’s mood not to allow any waivers on the measures agreed and documented in the Stand-By Arrangement (SBA) including phasing out of harsh upfront conditions remains unchanged; and needless to add has remained unchanged since March 2022 when the sixth review under the now suspended Extended Fund Facility (EFF) programme was due.
The next two finance ministers – Miftah Ismail and Ishaq Dar – attempted to renegotiate the conditions; however, Ismail correctly gauging the Fund staff mood capitulated by August last year reflected by the seventh/eighth review agreed while Dar not only failed to implement the agreed conditions but proceeded to violate them at a massive cost to the country’s economy, thereby forcing the then Prime Minister Shehbaz Sharif to directly intervene in the matter to avert the looming threat of default.
In this context, it is relevant to note that the outgoing government agreed to the following three reform measures to improve fiscal transparency and effectiveness in the Memorandum of Economic and Financial Policies: (i) creation of “a Central Monitoring Unit (CMU) within the Ministry of Finance (MoF) in September 2022 to improve SOE monitoring and oversight functions and provide better analysis at the aggregate SOE level.
The CMU’s full operationalization will be completed with the hiring of the needed staff and publish its first periodic report on the performance of SOEs, in terms of section 31(3) of the new SOE law, using latest available data (a structural benchmark to be implemented by end-November 2023; (ii) ongoing efforts to “fully operationalize our treasury single account (TSA-2) by end-October 2023.
To support our cash management and forecasting efforts, which are necessary to benefit from the TSA and allow for more efficient debt and cash management, we have created the Treasury and Cash Management Unit and the Cash Forecasting Unit in the Federal Treasury Office in Islamabad;” and (iii) “To enhance transparency in all public procurement and with Technical Advisory support from the World Bank, the Public Procurement Regulatory Authority (PPRA) launched and piloted the e-Procurement System in early March 2023 with the health and education ministry as well as Punjab province.
We will fully roll out the system at the federal and provincial levels by end-December 2023. Leveraging the new regulations for publication of beneficial ownership information of Covid-related awarded procurement, the PPRA will have access to relevant databases on beneficial ownership, tax, and national ID registries, and make key and relevant information on procurement contracts publicly available.”
The deadlines agreed in the memorandum indicate that the caretaker government, particularly the ministry of finance would have a challenging task to not only complete the hiring process for the CMU by end-November, but also complete a more challenging task of fully operationalizing the single treasury account and not only to allow public access to beneficial ownership but also fully roll out the e-procurement system by end December in all four provinces as well as the federal government – measures that would require time.
At present, the only SBA conditions that are being seamlessly implemented relate to administrative measures to pass on the hike in the international price of fuel (with a petroleum levy adjustment if required to reach the budgeted target of 869 billion rupees under this head) and electricity tariff with Nepra indicating that it would allow an additional quarterly tariff adjustment of 2.31 rupee per unit for six months to generate 146 billion rupees shortfall in the fourth quarter of 2023 against the distribution companies proposal to raise tariffs by 5.41 rupee per unit.
The outcome would be a further rise in domestic inflation that is already hitting the poor and vulnerable as well as the lower to middle earners particularly hard.
At the same time, the contractionary fiscal and monetary policies without a commensurate reduction in government expenditure and nearly 85 percent of all foreign exchange reserves sourced to external borrowings is putting further pressure on the external account – a pressure exacerbated by the Fund’s demand to remove some of the administrative restrictions on imports which may raise revenue but would put pressure on the balance of payments.
There is an emergent need for the caretakers to take all stakeholders on board and seek voluntary sacrifices in terms of their budgeted expenditure that would generate a little leverage with the Fund instead of continuing to focus on raising tax revenue, given that 85 percent of reliance is not on ability to pay taxes but on indirect taxes whose incidence on the poor is greater than on the rich.
Copyright Business Recorder, 2023