EDITORIAL: A briefing by the Finance Division to the Federal Cabinet claimed that the delay in the International Monetary Fund (IMF) fielding the ninth review mission was on the part of the Fund and presented detailed macroeconomic targets agreed with the mission that was fielded from 31 January till 9 February as opposed to the scheduled review on 3 November 2022 according to the seventh/eighth review documents dated August 2022.
This statement is inaccurate for two reasons. First, two policy decisions were taken that violated the letter and spirit of the seventh/eighth review agreement that delayed the arrival of the Mission to negotiate the ninth review notably (i) the economically disastrous policy to control the interbank rate (without available foreign exchange reserves to intervene in the market to shore up its value) that led to a differential of between 40 to 50 rupees per dollar in the rate available in the grey market which, in turn, re-energized the hundi-hawala system that had almost ceased subsequent to the global lockdown.
This accounted for around 1.8 billion dollars of lower remittance inflows during the first half of 2022-23 as opposed to the comparable period of the year before.
It is relevant to note that a mere few hours after the rupee was de-controlled on 27 January the Fund announced that it will field the mission on 31 January and the press release issued by the Mission dated 9 February specified a key priority as “allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage; and (ii) the announcement on 6 October by Finance Minister Ishaq Dar that the government would provide unfunded subsidised electricity to exporters at a cost of 110 billion rupees to the exchequer.
This populist but flawed decision was also reportedly abandoned during the negotiations with the Fund noted in the press release which emphasized “reduction in untargeted subsidies” as another key priority.
The briefing to the cabinet further noted that the government had negotiated a number of targets as follows: (i) budgeted Federal Board of Revenue target of 7.47 trillion rupees was revised upward to 7.64 trillion rupees or a total of 170 billion rupees for the remaining four and a half months of 2022-23.
The Finance Minister claimed in parliament that media reports that the Fund had requested from between 500 to 800 billion rupees of additional revenue for the remaining months of the fiscal year were accurate, and credited the government team for negotiating it downward.
This is a half-truth as the Fund noted in the press release issued on 9 February that a key priority was “strengthening the fiscal position with permanent revenue measures ”or, in other words, these measures would generate around 510 billion rupees next fiscal year – measures that include a raise in the standard general sales tax from 17 to 18 percent as would other indirect tax measures whose incidence on the poor is greater than on the rich; (ii) revised petroleum levy (not part of the FBR taxes) will be 650 billion rupees and not the budgeted 855 billion rupees.
This claim is also not accurate as the budgeted revenue from the levy is 750 billion rupees and unless the government legislates raising the maximum limit of 50 rupee per litre as petroleum levy to 70 rupees per litre total collection under this head for the year would be no more than 350 billion rupees; and (iii) total expenditure would be 11.225 trillion rupees as opposed to the budgeted 9.579 trillion rupees - a rise of 1.6 trillion rupees needs urgent clarification given that Benazir Income Support Programme (used to provide relief to flood victims) is to be raised by only 40 billion rupees from what was budgeted, and the Public Sector Development Programme scaled downward considerably.
It also merits an answer as to whether the government is at all serious about the expected recommendations of the Austerity Committee set up by the Prime Minister on 13 January 2023.
Gas and power tariffs have been revised upward as per the agreement with the IMF claiming in its end of mission press release that another key priority is “preventing further accumulation of circular debt and ensuring the viability of the energy sector.”
However, structural reforms remain pending in the energy sector as they do in the structure of taxes that are unfair, inequitable and anomalous.
It is, therefore, about time the government looked into concerns voiced by senior leadership of the IMF, including the Managing Director, domestic economists and the general public, that the elite capture in terms of taxes levied as well as resources disbursed needs to end.
Copyright Business Recorder, 2023