IMF review

The seventh staff review under the Extended Fund Facility (EFF) Arrangement and aModification of Performance Criteria was uploaded on the International Monetary Fund (IMF) website on 2 July, dated 12 June, or subsequent to the announcement of the budget 2015-16 lending credence to claims that the budget was first cleared with the Fund staff prior to its announcement. Unambiguously the uploaded press release on 26 June IMF Board decision states "the planned fiscal adjustment in the context of the fiscal year 2015/16 budget is appropriate. The authorities' plans to broaden the tax base, including eliminating tax exemptions and concessions, are welcome, though significant scope remains for increasing tax compliance and enforcement."
What exactly is the different approach being taken by the incumbent government relative to its predecessor that led to the seventh review maintaining that "the authorities should be commended for attaining all performance criteria and structural benchmarks under the programme for the seventh review, despite significant political and security challenges"? Unfortunately, however, the difference is in more stringent IMF conditions than in the past. Thus in the event that there is a revenue shortfall (and all Pakistani budgets, past and present, have consisted of unrealistic revenue targets for not only the next fiscal year but also for the outgoing fiscal year a mere three weeks before its end) the Dar-led Finance Ministry has agreed, unlike the previous government, to implement additional revenue measures (contingent measures) including bringing forward plans to eliminate tax concessions and exemptions slated for 2016-17. While there is a general discontent at the budget's finance bill yet confusion persists fuelled by the decision attributable to the incumbent Finance Minister disallowing the Federal Board of Revenue to either hold a press conference after the budget speech is delivered in parliament as well as a press briefing during the last hour of the last day of the fiscal year to clarify to the general public about the scope and extent of new taxes as was the practice in the past. The PBS officials as well as Ministry of Finance and SBP officials are severely discouraged from engaging with the press.
And unlike in the past where development expenditure was adjusted as and when there was a revenue shortfall, usually by the final quarter, the seventh review notes that "on the expenditure side the government plans to reduce expenditure allocations in the first nine months of the year compared to the budget to create a buffer against any revenue shortfall. These measures could yield savings amounting to 0.5 percent of GDP." The State Bank of Pakistan website indicates the latest GDP of 27,383,722 million rupees and 0.5 percent of that amount would be 136,918 rupees or, in other words, the Finance Ministry has already committed to a reduction in Public Sector Development Programme (PSDP) from the budgeted 700 billion rupees to 563,082 billion rupees even before the budget was announced.
Another difference is that while in the past, including during the 2008 Stand By Arrangement, the government's capacity to repay the Fund was never in question however this time around the Fund notes that "the materialization of risks to the economic outlook could erode Pakistan's capacity to repay the Fund, particularly in a context where Fund exposure is expected to increase further." The question then becomes if there is a risk to the economic outlook and unfortunately the response has to be in the affirmative as there is a grave risk for four major reasons. First, discrepancies in the budget documents itself. These include a deliberate over estimation in revenue for 2014-15 for example 56 billion rupees was budgeted and shown as realized on account of sale of 3G licenses however PTA officials revealed that this sale never took place. And to further compound the error the budget shows another 65 billion rupees under this same head for 2015-16 - a sale that PTA officials say is not likely to fetch more than 56 billion rupees and may be deferred for yet another year as market conditions are not conducive. Secondly, revenue claims made by the government for 2104-15 (shared with the Fund) were thrice revised downward and were still lower than projected in budget documents and hence the deficit would have to be readjusted for the outgoing year. The projections for 2015-16 are also expected to be revised downward. And thirdly the penchant of Pakistan Bureau of Statistics (PBS) - that comes under the administrative control of the Minister of Finance - for data manipulation to show improved performance of key macroeconomic indicators including GDP growth rate has become increasingly a source of concern to domestic economists. During post budget briefing held in June 2014, over a year ago, Dar promised journalists that the head of PBS would hold a press conference to allay concerns with respect to data manipulation. That press conference has still to take place. The GDP growth rate is unlikely to pick up this year significantly though Dar has projected a 5.5 percent growth due mainly to the continuing power crisis and the commitment to reduce the budgeted deficit to 4.3 percent given that the ease of doing business in this country is not rated high.
The IMF also cautioned the government's euphoria over the investment inflow under the China-Pakistan Economic Corridor by stating that "modalities, terms and timelines of various investments under CPEC are yet to be determined" and "sound practices in pubic debt management and in the evaluation, prioritization and implementation of public sector investment projects will be important to ensure that maximum benefit accrues to all." Questions pertaining to the foregoing were raised by the media however the response, as has become the norm with this government, was not forthcoming other than to accuse those who query of being anti-state.
The question is who has so far been paying the cost of the EFF programme? Not the vulnerable Dar would have us believe. He has repeatedly claimed that Benazir Income Support Programme (BISP), was his idea and, during his budget speech this year, pointed out that his government raised the BISP allocation from 40 billion rupees during the last year of the PPP-led coalition government to 97 billion rupees in 2014-15 to be raised again to 102 billion rupees in 2015-16. The question is why did not Dar slash BISP allocation last year given that this was perhaps the easiest for him to get approval from the PML-N cabinet? The major reason, critics would no doubt point out, lies in IMF setting an indicative target for BISP disbursements which, the seventh review notes, were met. Apart from this social safety net programme the cost of Dar's revenue reforms were borne by the lower middle to middle income earners for two major reasons: (i) the government raised its reliance on withholding tax (estimated at around 65 percent of total direct tax collections) which, if the difference between filers and non filers is sufficiently large, may compel the non filers to deal only in cash; and (ii) sales tax (an indirect tax whose incidence on the rich is greater than on the poor). Little attempt was made to raise direct taxes premised on the ability to pay which accounts for the Board of Directors of the Fund's assessment that "significant scope remains for increasing tax compliance and enforcement."
Power sector reforms would also be payable by the general public. The government committed to the Fund to deal with the cumulative circular debt of 615 billion rupees by end March 2015 through: (i) capital expenditures and revenue based load management to reduce losses and improve collections. However, the socio political fallout of load shedding is being witnessed in poor areas and slums around the country while the hefty debt owed by federal and provincial governments/departments remains untackled with Sindh in particular challenging the credibility of its dues; and (ii) stock of Public Sector Holding Company (PHCL) established during the tenure of Shaukat Tarin as the Finance Minister would be transferred to Discos targeted for privatization which would ease "the servicing of PHCL debt" and the government has already allocated 0.1 percent of GDP to clear part of the stock of arrears that accrued with respect to some regional and local governments - so much for Dar's claims that the circular debt has nothing to do with the Ministry of Finance! The ultimate price of the interest payable on PHCL debt would be in the form of surcharge payable by the consumers.
So what are these far reaching power sector reforms that the government is engaged in? Higher tariffs to cover inefficiencies of the sector, levying and raising surcharges which were challenged in court but in case the verdict goes against it the government intends to pass on surcharges as tariff, and doing little to lower the distribution and transmission losses. All of these measures were part of the Stand-By Arrangement during the PPP-led government as well and, like its predecessor, the performance of this sector remains appallingly poor for the past two years.
To conclude, one can easily challenge the Finance Ministry's claims of in-house innovative policy decisions/proposals to turn the economy around. The IMF, however, remains engaged and would continue to do so as long as the government gives some ground - be it only on paper, most of the legislation is unlikely to be implemented in spirit, for example the SBP autonomy and including tax evasion under the anti-money laundering bill.