The announcement that the International Monetary Fund (IMF) has agreed to Pakistan's request to extend the Stand-By Arrangement (SBA) from 23 to 36 months would certainly provide a great deal of relief to the relevant authorities in the country. It was in general interest to maintain the relationship on an even keel for both the member nations and the Fund.
A member country opting out of a Fund Programme is problematic for the Fund staff. However, the risk of termination of the SBA, with its attendant negative implications for the economy of a state is far worse. According to a statement by the IMF, "the extension will provide time to the Pakistani authorities to complete the reform of the general sales tax, implement measures to correct the course of the fiscal policy, and amend the legislative framework for the financial sector".
The decision was made on "a lapse-of-time basis", a procedure whereby Directors are asked to approve the request, if they have no objection, without formal meeting of the Board of the Fund. The rationale for seeking nine months extension instead of three months is reflective of the realisation by our economic managers that the political leadership is not in a position to pass the RGST bill in the current financial year.
It is noteworthy that the IMF has been quite generous in its dealings with Pakistan in the recent past. The country's economy, which was badly battered by highly adverse factors including the outbreak of violence and was close to a balance of payments crisis in 2008, was rescued by the IMF through the approval of a loan arrangement (SBA) of dollars 7.61 billion on November 24, 2008 that was augmented to dollar 10.66 billion on August 7, 2009 and extended up to December 31, 2010. Of course, the borrowings from the IMF were phased out over time and their uninterrupted flow to the country was conditional on meeting the prescribed targets.
The fact that Pakistan failed to meet certain conditionalities has, however, not displeased the IMF to an extent to censure the Pakistani authorities and stop the flow of assistance to the country. For instance, Pakistan's request for waivers for the non-observance of two end-March, 2010 quantitative performance criteria was approved without any fuss.
Also, following the completion of the fourth review in May, 2010, the IMF approved Pakistan's request to re-phase three remaining disbursements into two, while keeping the total access under the arrangement unchanged. The latest extension in the SBA up to September 30, 2011 is also undoubtedly a great favour by the IMF to maintain the programme on track despite clear signals from the country that certain measures like the RGST would be hard to implement even in the extended period. We do not think that the Fund is hung-up on the RGST in VAT mode.
The proposal was put forth by Pakistan and an external fiscal expert Dr Ehtesham Ahmad was contracted by the finance ministry for this purpose. His desire to administratively oversee RGST's implementation was not acceptable to the FBR as it amounted to making him a super Chairman FBR. As such, he was shown the exit door. The RGST issue has been mishandled from the very beginning.
First, it was generally misconceived as a new tax instead of removing the distortions in the existing GST. Second, it got muddled with the flood surcharge. The transfer of money from the urban to rural Pakistan, due to high crop prices, for three consecutive years, with no commensurate tax additionally from the farmers is resented by the urban class. As a result, political parties with higher urban representation have the complete backing of the existing taxpayers, who are blocking documentation on grounds of inequity.
The generosity of the IMF should not, however, be taken to mean that it is very compassionate and violation of its conditionalities would do no harm to the economy of the country. The fact of the matter is that the Fund does terminate its facility with the member countries when a breach of performance criteria is consistently observed. It would certainly have treated our country the same way, had Pakistan not been a partner on the war on terror with the Nato countries, particularly the US, who are the major shareholders in the IMF.
In other words, Pakistan will continue to be in good books of the IMF and similar organisations till our interests are in perfect harmony with the developed countries and we continue to toe their line. Also, we need to understand that policy measures or actions agreed with the IMF are in our long-term economic interest and, contrary to the general perception, there would be no hidden benefits for the Fund or its staff.
For instance, Pakistan needs to bring its budget deficit to a sustainable level by undertaking harsh measures like enhancing revenue, slashing expenditure, reducing across-the-board subsidies and eliminating the growing deficit of the PSEs for the sake of macroeconomic stability and the revival of growth on a longer-term basis. We have to adhere, in any case, to strict financial discipline for the sake of our economic survival and not to keep the IMF in good humour.
The recent forecasts that Pakistan's fiscal deficit as a percentage of GDP could exceed seven percent of GDP during FY11 are really alarming. Our fiscal managers need to come up with alternate revenue raising proposals in a low growth scenario and undertake harsh expenditure control steps as our debt has already grown to a back-breaking level.
In our view, it is time for the authorities not to relax their efforts for good housekeeping and be complacent due to the extension granted by the IMF but to struggle more vehemently to pursue the agreed reform agenda by owning the programme wholeheartedly, with a view to pulling the economy out of quagmire. It would be helpful if the opposition parties adopt a conciliatory approach in the matter and some of their suggestions are also given due attention.
A change in government will not get us out of the current malaise unless we reform the way of governance. The starting point has to be the civil service and changing the rules of business, whereby, Prime Ministerial administrative powers devolve to cabinet sub-committees for posting, promotion and career planning of government officials. The present set-up reeks of nepotism and cronyism. It needs to be replaced with meritocracy for implementation of good governance.