An International Monetary Fund (IMF) team, scheduled to visit Pakistan in the first week of this month, has postponed the visit due to an escalation in security concerns in the aftermath of the killing of Osama bin Laden. Be that as it may, the scheduled mission was not labelled a review mission, sources in the IMF revealed to Business Recorder. This indicated that discussions would not have focused on our compliance with conditions under the stalled Stand-By Arrangement (SBA), which would have opened the possibility of the release of the penultimate tranche.
The government's contention was that the three presidential ordinances issued on March 15 concurrently with the doubling of the special excise duty, as well as the ending of some exemptions in the statutory regulatory order (SRO) issued by the Federal Board of Revenue were sufficient measures in themselves for a dividend as the fiscal deficit has been reduced.
On April 7, 2011, the IMF placed a Programme Note on its website acknowledging that "some progress has also been made recently in modifying the existing general sales tax by reducing exemptions and strengthening the refund mechanism. However, this reform has been delayed and its scope has been far narrower than earlier envisaged.
Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability. Further, the legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months."
The IMF mission visit would have indicated to other multilateral and bilateral donors that Pakistan stays under the watchful gaze of the Fund as they await the green light to release the funds committed to Pakistan, which are in the aid pipeline.
According to IMF's fundamental mission statement it "help(s) ensure stability in the international system. It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members." In Pakistan's context, the lending option is not on the table at the present moment in time. Thus the visit of the IMF team would focus on continued surveillance of the Pakistan economy as well as providing guidance and training on how to upgrade our institutions, and design appropriate macroeconomic, financial, and structural policies. In effect, the IMF team would no doubt review the budgetary proposals, particularly with respect to taxation proposals as well as those pertaining to institutions requiring reforms.
The April Programme Note also stipulates that real GDP growth is unlikely to exceed 23/4 percent in 2010/11 and the need is to reinvigorate economic reforms required to "strengthen public finances and improve financial intermediation, and to raise economic confidence to stimulate higher savings, investment, growth and employment. Stronger public finances are needed to allow for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium-term. Economic reforms will also mobilise financial support from external donors and spur greater private capital inflows."
The government remains constrained from taking effective reform measures as proposed by the IMF as well as by domestic economists with the full support of its coalition partners. The inability to levy the reformed general sales tax and to reduce the subsidy from the budget, and speed up the privatisation process have been held hostage to political wrangling within the Federal Cabinet itself.
Analysts argue that with the induction of the PML (Q) in the Cabinet, the government would have a comfortable majority to pass the budget in the assembly which would include passage of taxes imposed through the Presidential Ordinance. The time to begin implementation of the politically challenging reforms is at hand. The government must realise that to ensure its political fortunes in the next elections, it is critical to turn the economy around without any further loss of time.