Can the Pakistan authorities negotiate a package with the International Monetary Fund (IMF) that would provide time to identify, agree and implement major structural reforms - particularly in the several decades long poorly performing tax and power sectors?
Or would the Fund insist on generating a stipulated revenue amount from specific sources (reportedly the IMF is insisting on an additional 800 billion rupees) as well as raising utility rates (electricity rate rise of 25 percent has been proposed) to cover the cost of poor governance (past and ongoing) as short (prior) to medium term (during the three year programme) conditions?
The answer is unlikely to be affirmative. The reason: IMF is likely to look at Pakistan's previous history, gleaned from 21 previous arrangements (bailout packages) in seventy one years, in not meeting the conditionalities (particularly with respect to implementing structural reforms); and hesitate if not outright refuse to give the Pakistan Tehrik-i-Insaaf (PTI) government the benefit of the doubt: that it will deliver on agreed conditions where previous status quo parties/military dictatorships did not.
Reliance by the IMF team on its previous engagements with Pakistan would receive further traction because: (i) Pakistan's chief negotiator, Dr Hafeez Sheikh, reneged on conditions agreed under the 2008 three-year Standby Arrangement (SBA) with respect to tax and power sector reforms. Sheikh was unable to withstand political pressure from the PPP-led government and, instead of resigning in protest, opted to allow the arrangement to lapse with two tranches remaining un-disbursed; and (ii) the Extended Fund Facility (EFF) effective 2013 to 2016 gave considerable leverage to the then finance minister Ishaq Dar through numerous waivers before almost all tranche releases and allowed him to implement economically flawed policies with disastrous consequences for example keeping the rupee overvalued to understate the rising external indebtedness and stockpiling foreign exchange reserves through incurring debt/ debt equity.
The PTI government to date has focused on reducing the current account deficit (through procuring one year loans from three friendly countries amounting to a total of around 8.2 billion dollars); however it has not focused on reducing the unsustainable budget deficit which has increased since the Khan-led administration took oath due to: (i) higher allocations than budgeted in PML-N's April budget on major recipients of current expenditure in the first half of the current year (defense and running of civilian administration) in spite of savings due to sale of cars/water buffaloes etc; (ii) the second amendment finance bill 2019 envisages an industrial package of around 140 billion rupees as per independent economists rather than the 10 billion rupees envisaged by Asad Umer; (iii) tax revenue collection shortfall is projected at 300 to 350 billion rupees by the end of the year; and (iv) the decline in development spending will contain the deficit to 7.2 percent, if all else remains the same, but with growth slowing down as a consequence revenue shortfall maybe even higher.
The dismissal of Governor State Bank of Pakistan (SBP) is unlikely to provide a comfort level to the IMF as history reveals that the SBP has always implemented the Fund's conditions, as did Tariq Bajwa. His dismissal however was the need of the hour as he did a grave disservice to the present government by comparing the targets set by PML-N in the April budget, an election year budget which was completely unrealistic, with what was achieved by the present government in its second quarterly report. Similarly firing the Chairman of the Federal Board of Revenue is also not likely to provide a comfort level to the Fund as FBR chairmen have toed the line set by the Minister of Finance.
So where does that leave the negotiations? IMF is unlikely to be convinced with claims of reducing civilian administration through reforms, which appear to be focused on changing National Accountability Bureau laws with the objective of instilling confidence in the civil servants who feel humiliated when summoned by NAB. It is also not likely to be convinced by claims of a reduction in power theft that has generated 50 billion rupees with a circular debt of over 1.5 trillion rupees. The Fund mission is going to be skeptical of a long term phased structural reform package in the tax and power sectors with a budget deficit of over 7.2 percent given its experience with Pakistan in the previous 21 arrangements. The amnesty package as a source of revenue would be opposed by the Fund as such packages are deemed a disincentive to legitimate tax payers and fail to take account of Financial Action Task Force's concerns. And last but not least the Fund would support privatization of loss making state owned entities, instead of the plan proposed by an experts' panel for Pakistan Steel Mills, which would require further budgetary injections.
The package proposed by the visiting IMF mission is therefore likely to be politically even more challenging than the SBA that Hafeez Sheikh, as the then finance minister, failed to implement. The question comes down to the Prime Minister and one indication whether he is committed to the IMF package, irrespective of its conditions, would be if the cabinet endorses the entire raise in prices of petroleum and oil products as recommended by the ECC this Tuesday - a raise that is lower than what was recommended by Oil and Gas Regulatory Authority due to the ECC deciding to cut sales tax on petrol by 5 percent (and not on HSD which determines the price of transport). The views expressed in this article are not necessarily those of the newspaper.