New IMF programme: Pakistan has to take tough measures before going to IMF: Ehtasham

Pakistan's former representative on the IMF Board, Dr Ehtasham Ahmed on Monday said that Pakistan had to undertake tough measures prior to starting negotiations with the International Monetary Fund (IMF) for any new programme. The government needs to introduce massive reforms in the taxation system particularly to implement Reform General Sales Tax (RGST).
He was giving a presentation during a seminar on "The Urgency of Tax Reform: The Challenges to the Macroeconomic Situation and Devolution" organised by Institute of Development and Economic Alternatives (Ideas) and Foundation Open Society Institute Pakistan in collaboration with National Press Club here.
Dr Ehtasham stated that reforms in the taxation system should be the top priority of the government to bring the economy out of the prevailing crisis. "If the government did not revamp the entire taxation system, the IMF is not seemed to be in a mood to disburse a single penny. We have to do a lot prior to go to IMF," he said.
According to the former IMF Board representative, no more easy money from IMF would be available without tough measures by Pakistan even for starting negotiations for a new programme. He underlined the need to implement tax system at the provincial level. The 18th amendment was the reaction to centralisation of public health care system and higher education, he added.
He said that China's tax-to-GDP ratio had fallen from 25 per cent to 12 per cent in 1992. However, they introduced central tax administration and VAT. China introduced a new tax administration and government must learn from Chinese VAT experience. Referring to the SRO culture, he said that the FBR by-passed Parliament by issuing exemption SROs under the existing sales tax regime. Under the SRO culture, the FBR resorted to sectoral discrimination, he added. He said that the government must tax agriculture income and value-added taxes must be implemented through constitutional amendment.
Highlighting the impact of 18th Amendment on provinces, he stated that the primary education was the responsibility of the government under 18th amendment. "On the other hand, there is no assurance of higher education from the government as public security and higher education are interconnected," he added. It is the right of the provinces to borrow directly without reference to overall sustainability, adding that full accountability of functions and functionaries is essential.
Dr Ehitsham Ahmed said that Pakistan had to take corrective measures by adjusting its fiscal framework in the range of 5 to 6 per cent of GDP on immediate basis by enhancing revenues as well as cutting down expenditures. "IMF has suspended the programme of some other countries, which have much improved indicators as compared to Pakistan," he noted. He was of the view that the IMF was not going to send its review mission to Pakistan but a team of the Fund was coming to analyse budgetary figures.
The IMF did not put Pakistan's programme into suspension mode since May 2010, but its recently issued public note made it clear that the Fund would not take any pressures and Pakistan would have to perform to overcome its key challenges particularly it faced with fiscal side of the economy.
The foreign exchange reserves stood at $14.25 billion at the moment in accordance with the IMF's definition out of which around $9 billion owed by the IMF, showing that the actual reserves were just $5 billion, Dr Ehitsham commented. While comparing with October 2007, he said commodities and energy prices were again escalating putting pressures on the country's external accounts and the current level of reserves would disappear in the next coming few months.
He said the sustainability of rising remittances was a surprise for him. It was estimated in 2008 that foreign remittances would decrease, but the increasing trend needed to be investigated by the concerned authorities. The State Bank of Pakistan (SBP) should analyse the situation by conducting research on this unusual phenomenon, he added. To a query, he said that the US might come for Pakistan rescue. "But if we continue to rely on US for rescue, we would be in deep trouble," he added.
He said that the lingering controversy on RGST on services should have been linked to the implementation on NFC Award at time of finalising the resource distribution formula. Dr Faisal Bari, economist Dr Anjum Naseem, former member of NFC Dr Gulfraz Ahmed, Dr Zubair Khan and Director IDEAS Dr Reehana Reza and other spoke on the occasion.