In its recent report, the Institute of Policy Research, headed by Dr Hafiz Pasha, has attempted to find faults with the description of the economy given by the IMF in the backdrop of recently concluded 9th Review. As we would argue, the weak arguments and unreasonable opinions expressed in the Report is not based on correct reading of the data and information available on record.
Dr Pasha has suggested that the IMF has either misrepresented or used wrong information fed by the government. Both assumptions are false. Government provides all relevant information as per standards without any fabrication nor is the Fund unaware of the trends currently prevailing in the economy. The Fund and the government have considerably more man-hours devoted to economic management in Pakistan than the time Dr Pasha and his team spends in criticising the economic performance of the government. From the outset of the programme, he has expressed doubts on country's performance. He never hesitates in expressing the view that the programme is a gift of the IMF to Pakistan requiring no discipline or reforms.
Dr Pasha has taken exception to the IMF's assessment of the growth outlook and has pointed out that he was ignoring some recent negative trends, including the damage to cotton crop. Before responding, let us point out that a difference of professional opinion regarding a forecast of future growth does not represent a "false statement".
On the more substantive basis regarding the growth outlook, we are again surprised at the claim of Dr Pasha that the damage to cotton crop would cause a one-percentage point decline in the GDP estimate, for which he has cited no formal assessment. Indeed, he has not made a correct assessment of the impact. The share of cotton in GDP during 2014-15 was recorded at 1.45%. Assuming that relative shares of different sectors would be maintained, a 28% slump in the cotton crop would have a 0.38 percentage points impact on the GDP growth, holding other things constant. The larger import of cotton bales in the first half (3 times more than last year) is an indication that the shortfall would be made up and the textile value chain would remain unaffected. The export performance is the result of global recession and adverse terms of trend rather than any major slowdown in domestic production. Just as exports are hurting us, the country is benefiting immensely from lower import values. Larger amount of dollars have been saved due to lesser import values than lost in lower exports. The claim that the increase in import quantities has adversely affected production of import substitution industries is again without a basis. The most notable increases in the production of LSM sector during July-November 2015-16 are those of automobiles (32%) and fertiliser (15%), chemicals (11%), rubber products (9%), pharmaceuticals (6%) all of which are import substitution industries. The decline in the iron and steel production is indeed the result of the PSM failure (for which the present government is not responsible but doing all that is possible to change its ownership for its early revival). However, excluding PSM, the private sector production is on the rise and recent successful listing of private sector mills in the stock exchange augurs well for the future of this important industry.
There are also other mitigating developments that would weigh against the damage to the cotton crop. For instance, the increase of 79% in the credit to the private sector during the period July-January (16th) 2015-16 compared to the same period last year. Early indications point to a bumper wheat crop, as the area under cultivation has increased and the quality of the crop is looking good. At 4.43%, growth in LSM is robust during July-November 2015 compared to 3.15% for the same period last year. Increase in cement dispatches of 11% during the first half of fiscal year is an indication of strong performance in the construction sector. The nearly 40% increase in PSDP, from Rs 502 in 2014-15 to Rs 700 billion in 2015-16) also points to a higher investment during the year. All these indicators point to a continuing upward trajectory in country's growth rate during the year.
It is true that there is no number available at present to decide the current status of poverty. During the program period, however, the economic growth has revived and compared to an average of 3% during the period 2008-13, it has averaged at around 4.1%. Such a growth cannot have but a positive impact on the poor. More importantly, the poverty reducing expenditures (PREs) during the last two fiscal years increased from about Rs 1.913 trillion to Rs 2.178 trillion, showing a growth rate of 14%, again pointing to positive impact on poverty. The BISP program, the most prominent vehicle to supplement the incomes of the poorest segments of population, has been used by the present Government to reach out to the most deserving people of the country. The Government has increased the coverage of families from 3.7 million to 5.4 million households (about 70% of the poorest households living below the poverty line) at the end of June 2016. Moreover, the size of the program has been increased from Rs 40 billion to Rs 105 billion, a 2.6 times increase. The level of income support stipend was also increased from Rs 12000 per year to Rs 18000 per year, an increase of 50%. With such level of support and outreach to the poor it is untenable that the program is contributing to poverty. In reality the reforms under the program have revived growth and created room for continued private sector led growth.
Regarding the size of fiscal adjustment, Dr Pasha contends that circular debt should be counted as part of the fiscal deficit. First, circular debt is a stock which cannot be added to the budget deficit, which is a flow. Second, one may look at the Government Finance Statistics Manual 2014 of IMF that describes the elements that form Government Finances. Furthermore, we would like to say three things to establish that Dr Pasha is making misleading arguments. First, the government has not retired circular debt nor is it responsible for its retirement or for that matter its accounting in the budget. What the federal government did in 2012-13 was to recapitalize the public sector corporations through new equity investments. It would be absurd to argue that this one-off investment should be recurred every year. Second, even during 2011-12 the deficit was at 8% and the projected fiscal deficit for 2012-13 was 8.8%, which was brought down to 8.2% within few weeks through effective control on expenditures. Subsequently, it has been brought down to 5.7% and 5.4% in 2013-14 and 2014-15. Even when his position is granted (regarding circular debt), there has been real fiscal adjustment achieved by the Government during its tenure. Third, the circular debt paid-off by corporations was only partial as nearly Rs 100 billion remained unpaid during 2012-13. Thus from the present outstanding amount of about Rs 300 billion, only Rs 200 billion have been accumulated during the present government. Furthermore, a significant part of this amount is not overdue, and hence not a source of economic disruption. The Government has no plan to make any future equity investments in power sector companies, as after the support provided in 2012-13 the companies are gradually improving their performance because of tariff being set closer to cost recovery levels through energy sector reforms by the present government.
The apprehensions expressed by Dr Pasha that the fiscal deficit target of 4.3% would not be met and that the deficit would stay at 5.3% level of the last year are unfounded. First, it may be noted that in the first-half of the fiscal year, deficit has been recorded at 1.8% that is significantly below the target of 2.1%. Second, the Federal Government's share in the subsidy under the Kissan package has been fully paid and has not caused any burden on the budget as it has been absorbed through adjustment in other current expenditures. Third, it is not anticipated that there would be any significant overrun on account of tariff differential subsidy, as the benefit to industry of lower tariff would be absorbed in falling oil price. The GIDC collections would also be on target. Dr Pasha's claim of shortfall in the cash surpluses is totally baseless as the surpluses in the first half of the current fiscal year amounted to Rs 208 billion compared to the target of Rs 168 billion.
Regarding Dr Pasha's critical statements pertaining to tax revenue, we would like to clarify some facts. The ratio of FBR taxes to GDP has improved significantly over the last two years, from 8.45% in FY2012-13 to 9.5% in FY2014-15, and is projected to increase to 10.1% in the current year. The number of income tax return filers has increased by more than 40 percent, from 722,000 to 1,022,000, between tax years 2012 and 2014. There has also been an exponential growth in cases selected for audit and tax demand created and collected in audit cases. For Tax Year 2011 only 12,609 cases were selected for audit, out of which tax collection was around Rs 1 billion. The number of cases selected increased to 75,871 for Tax Year 2015. In the preceding financial year, tax demand created out of audits was Rs 50 billion, out of which Rs 8 billion was collected during the year.
On the power sector, the remarks in the report are not based on correct facts. The average demand supply gap in the power sector has reduced to 2,800 MW in FY 2014-15 compared to 4,645 MW in FY 2012-13. This has translated in a reduction of load-shedding to an average of 6 hours a day and continuous power supply to the industry. The electricity consumption in industrial sector has increased by 13.14% during the last two years and the share of industrial sector consumption reached the highest level of 29 % in FY2014-15.Therefore, the claim that consumption per industrial unit may have fallen is not based on facts and figures. Government has also sustained gas supply to units in Punjab and even for the winter months through a special package, this supply has been maintained. Government is actively working on various energy projects including coal, LNG, hydro and renewables, which is expected to add 10,000 MW to the national grid by March 2018. This addition will address the overall energy gap in the country.
Another suggestion by Dr Pasha has been that successful conclusion of the programme depends on "liberal continuation in programme waivers, as has been the case in the reviews up to now." This is a misplaced perception. Seeking a waiver from a Quantitative Performance Criteria (QPC) during a review of the programme is necessary from time to time but is certainly not a freebie. The Factsheet on IMF conditionality describes the process of waiver as follows:
If a QPC is not met, the Executive Board may approve a formal waiver to enable a review to be completed, if it is satisfied that the programme will nonetheless be successfully implemented, either because the deviation was minor or temporary, or because the country authorities have taken or will take corrective actions. [Emphasis added]
Barring some changes necessitated by the evolving environment, especially on the external side, the country is performing under the same program goals negotiated in July 2013. A small desk-research based on an examination of the completed reviews would help enable those who have doubts on the veracity of this claim.
(The writer is Economic Adviser, Finance Division)
Comments
Comments are closed.