EDITORIAL: Finance Minister Muhammad Aurangzeb has clearly hit the ground running as evidenced from his first interaction with the media a day after he took oath as the federal finance minister. Given the concerns of lenders, multilaterals and bilaterals, at the sustained failure of previous administrations to implement agreed structural reforms, as well the general public’s deepening hardship with poverty levels continuing to rise from the 40 percent estimated by the World Bank last year, Aurangzeb’s comments on the way forward have eased concerns amongst our international donors, the public though will give its thumbs up as and when the rate of inflation declines from the current high of 30 percent, unemployment declines as the economy picks up pace, and energy prices begin to be comparable to those prevalent in our neighbouring countries.
The incumbent finance minister reiterated what was generally known that the country has no other option but to seek another longer term International Monetary Fund (IMF) programme. He specifically referred to an Extended Fund Facility (EFF) which would be the third since 2013 - one each during the administration of Pakistan Muslim League-Nawaz (PML-N) (2013-17) and Pakistan Tehreek-e-Insaf (PTI) (2019-early April 2022). The 2008 loan was a Stand-By Arrangement; however, it was suspended as the then Asif Ali Zardari-led government did not implement the agreed tax and power sector reform conditions – reforms that no subsequent government implemented, which accounts for these two sectors reaching a boiling point today that in turn has compelled lenders to insist on harsh upfront conditions. The EFF is financed from the General Resources Account, which is extended on non-concessional terms, normally at a minimum floor of 5 basis points and a margin (currently at 100 basis points) plus surcharges depending on the amount and time the credit that is outstanding. Its duration is up to four years with a, ex-post focus on structural reforms and ex-ante on prior actions.
Pakistan has received Extended Credit Facility (ECF) three times – 22 February 1994, 20 October 1997, and 6 December 2001 - a product whose source of funding is Poverty Reduction and Growth Trust, which is extendable to 5 years, and is at zero interest rate. This would be an ideal product for Pakistan, given our current indebtedness levels, however, it is unclear whether we are still eligible for an ECF even though our poverty levels match that of many African countries.
Be that as it may, Aurangzeb categorically stated that his first priority would be to plug all leakages to the tax collecting Federal Board of Revenue (FBR) – leakages that range from exemptions to the elite largely for political reasons to corruption within the Board to legal lacunae employed by those sent notices. And it stands to reason that as and when these leakages are plugged considerable revenue will be generated that would not only satisfy the lenders but also the general public as to-date there is almost 75 to 80 percent reliance on indirect taxes whose incidence is greater on the poor than the rich.
Aurangzeb acknowledged that spade work for the required reforms has already been done to a great extent, a statement of fact as Business Recorder repeatedly brought it to the attention of previous economic team leaders though to no avail that studies by domestic and international consultants on reforming the pension system, the power sector and the tax sector are gathering dust in the ministries. If the incumbent finance minister can be empowered to implement these strategies, the Shehbaz Sharif-led government will go down in history as one that set the ground-work for the take-off stage – a stage that has frequently though inaccurately been alluded to by previous administrations.
The new finance minister pledged PIA sell-off and implementation of Public Sector Development Programme on a public private partnership mode – a mechanism that is fully supported by the Pakistan People’s Party (PPP) though to-date not by the PML-N. His success would indicate that the era of supporting the Ishaq Dar-led finance ministry’s flawed strategies are truly over that would no doubt provide a comfort level to lenders and the public alike.
Aurangzeb’s vision is fully supported though we would have hoped that he had also dwelt on cutting current expenditure, which, on average, has risen by 20 to 23 percent every year. We would like to believe that his reticence is due to his intent to engage with recipients (stakeholders) behind closed doors rather than any lack of focus.
Copyright Business Recorder, 2024
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