The International Monetary Fund's (IMF) staff report on Article IV consultations as well as the ninth review of the 6.64 billion dollar Extended Fund Facility once again notes granting of waivers to the government for failing to meet two agreed performance criteria (PC). First, the target for net domestic assets (NDA) of State Bank of Pakistan (SBP) was missed by 172 billion rupees (a whopping 4.9 percent of the reserve money). What is significant is that the Fund staff acknowledged that the first PC was missed due to a higher cash demand due to the two Eid festivals, higher volume of cash transactions as a consequence of the levy of 0.6 percent on all banking transactions of non-filers, reduced temporarily to 0.3 percent, (a concern that was repeatedly voiced by Business Recorder with respect to this levy) and injections into the interbank market rate to align the money market rates closer to the lowered policy rate. The report notes that prior action notably to bring the stock of NDA to or below 2.652 trillion rupees was met before the report was released, implying thereby that the lending by commercial banks and SBP (though lending to the government by the SBP was within programme's targets) to mainly public (and private sector entities) minus the banks' borrowing was reduced as a prior action; or, in other words, given that the government target of borrowing from SBP was met borrowing from the commercial sector was reduced as a prior condition. The Fund staff, however, expressed concerns over the structure of the deficit and pointed out that it was based on a large trade gap (7.5 percent of GDP), financed by remittances (7 percent of GDP) and other transfers which highlight the importance of increasing Pakistan's export competitiveness.
Secondly, the government missed the budget deficit target by 23 billion rupees (0.1 percent of GDP). This small amount was subsequent to the 40 billion rupee mini-budget announced in December.
An indicative quantitative performance target was also missed, so noted the IMF staff report with respect to tax revenue. The end-June indicative target for tax revenue was 2.588 trillion rupees, end-September target 640 billion rupees whereas actual revenue was 600 billion rupees necessitating a 40 billion rupee mini-budget. And the next quarter (end-December) target is more than double that of the first quarter at 1.390 trillion rupees which does present an extreme challenge leading independent economists to maintain that the tenth staff review would stipulate the passage of yet another mini-budget as a prior condition. However, the report notes that the government has commenced a consultative process to end tax concessions and exemptions to the tune of 0.3 percent of GDP on an annualised basis and implementing this by the end of next month but only if December revenue targets are not met which, informed sources in the Federal Board of Revenue revealed to Business Recorder, is unlikely.
In the Memorandum of Economic and Financial Policies, the government committed to avoiding tax amnesty schemes thereby ignoring the recently announced Voluntary Tax Compliance Scheme (VTCS) (launched on 1st January 2016) which may have prompted the IMF mission leader for the ongoing programme, Harald Finger, to state in a teleconference with the local media that international experience shows that tax amnesty schemes undermine tax compliance, weaken revenue collections and penalise compliant taxpayers (as repeatedly argued by BR). The VTCS is not mentioned in the staff report which is unfortunate as it reflects Staff failure to take account of a policy decision by Pakistani authorities subsequent to Board's approval of the tenth tranche that the Fund management opposes on economic grounds. This accounts for Finger being prompted to make a rather inane comment namely to recommend to the government to implement VTCS to minimize these elements.
The Fund, however, set seven new structural benchmarks out of which only two reflect the failure of the authorities to meet specific targets notably in drafting two legislations that include the Anti-Money Laundering Bill which the relevant Senate standing committee under Saleem Mandviwalla approved with respect to sales tax but not income tax (inexplicable from an economic perspective though perhaps not so from a personal perspective) and granting real autonomy to the SBP in pursuit of price stability as its primary objective. If past experience is any guide then autonomy of SBP, even if it is protected through a law, can only be meaningful if the Governor SBP chooses to do so and the Ministry of Finance realises that this autonomy is good for the financial system. Otherwise, no matter whatever is given in the law, autonomy of SBP will largely remain personality-specific and the concept of autonomy will become illusory. There are two broad reasons behind the Central Board of Directors of SBP's dependence on Ministry of Finance: (a) Directors are the appointees of federal government, (b) Secretary of Finance is an ex-officio member of the Board of Directors of SBP. The IMF does not want that; that is precisely the reason why a Monetary Policy Committee (MPC) without Secretary Finance has been constituted on Fund's instance. The recommendatory powers have become mandatory to fix SBP's policy rate.
The other new benchmarks include (i) a comprehensive monitoring system for tax audits such as number of risk-based audits as well as qualitative indicators (end December 2015), (ii) amendments to the Penal Code 1860 and the Code of Criminal Procedures 1989 (end January 2016), (iii) determine multi-year tariffs for Iesco, Lesco and notify them for Iesco, Lesco and Fesco, (iv) enact gas theft ordinance and last but not least (v) enact a time-bound action plan with specific measures to improve the business climate with the Fund citing the decline in Pakistan's ranking to 138 out of 189 countries in the World Bank's Doing Business Report and 126 out of 140 in the World Economic Forum's Global Competitiveness Report. However, the Fund staff recommended regulatory reforms and increasing shares of trade and public investment to GDP by one percentage point each to raise Pakistan's potential growth rate to 6.5 percent in 2017-21. Such recommendations belie the impact of the inordinate focus of the Fund staff with respect to discussions with Pakistani authorities on programme modalities on reducing the budget deficit which is continuing to have negative implications on growth.
The Fund downgraded the government's budgetary data on three major indicators for fiscal year 2015: growth at 4 percent as opposed to government's claim of 4.2 percent, inflation (GDP deflator in percent) at 6.9 percent as opposed to government's claim of under 4.8 percent, and gross public debt at 64.9 percent to government's claim of 62.9 percent.
The Fund also noted that the government has agreed to absorb the additional spending on agricultural support package (announced prior to the local bodies elections) within the recurrent spending envelope, additional spending as a reclassification of non-plan loans (amounting to 0.1 percent of GDP) to be made through reallocation of existing capital expenditure plans including at the provincial levels. However, critics of the government maintain that these commitments may be a challenge; and if past precedence is anything to go by, the actual cost would be borne by slashing development expenditure. They, however, acknowledge that subsidies, a component of recurrent expenditure, have declined but interest on government debt has been steadily rising as the government borrowing rises. Interestingly, the report does note that there was a disagreement between the Fund staff and the authorities with respect to public sector borrowing crowding out private sector borrowing (with implications on growth) and the rupee remains overvalued (though this time around the Fund staff desisted from giving a ridiculously wide-range - between 5 and 20 percent - as the rupee overvaluation). However, the assessment by the Directors of the Executive Board of the IMF notes that a 17 percent appreciation of PKR has taken place in two years.
Be that as it may, the Fund's decision to release the tenth tranche does reflect the fact that Pakistan did adhere to the narrow reform path agreed with the Fund by "reducing near-term vulnerabilities. Helped by supportive policies, low oil prices and strong remittances, the budget deficit and inflation have declined while foreign exchange buffers have strengthened considerably". The Fund's foreign exchange reserves figure is 16 billion dollars which is at odds with the government's total of 21 billion dollars given that the private sector foreign currency accounts are not included by economists. Unfortunately, the supportive policies focused on raising revenue as opposed to reforming the tax structure, raising power sector tariffs without major improvement in governance (with quasi fiscal losses accumulating to a stock of 2 percent of GDP), increasing reliance on provinces to raise budget surpluses (which maybe a challenge in provinces where the PML-N is not in power given the rise in trust deficit) and increasing the number of units to be privatised within a shorter span of time given delays due to adverse market conditions.
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