From 5 to 14 December 2017, an International Monetary Fund (IMF) post-programme mission led by the same man who led the much criticized Extended Fund Facility (EFF) programme (September 2013-16), Harald Finger, held monitoring discussions with "Pakistan's economic team, representatives of the business community, and academics," in a press release uploaded on the Fund's website.
Finger's assessment of the Pakistan economy is clearly biased in favour of his own team's design of the EFF with his reference to the need to "preserve Pakistan's hard-won macroeconomic stability." IMF's senior management's defense of the EFF is reminiscent of former Prime Minister Nawaz Sharif's unstinting and, what many economists believe, unmerited support for Ishaq Dar's flawed policies. One can only urge the Fund to allow its independent evaluation department to review the EFF as the programme came under considerable criticism by domestic economists mainly because the reforms that Finger claims led to macro-economic stability never took place.
The two sectors the Fund as well as other donors - multilateral and bilateral - have been consistently urging successive administrations, including the incumbent, to reform in programme after programme have been the power sector and the tax structure. Serious governance issues continue to prevail in the power sector irrespective of the considerable rise in generation capacity with the resurfacing of the circular debt (subsequent to Dar illegally eliminating it on the second last day of fiscal year 2012-13), poor performing distribution network (and failure of the government to privatize distribution companies as committed in the EFF), and a transmission system unable to transmit the lower pre-2013 supply capacity leave alone the post 2013 rise in generation.
In this context, it is relevant to note that the Asian Development Bank's (ADB) independent Evaluation Department has indicated it would undertake a power sector study (2005-17) on ADB's experience in supporting Pakistan's power sector which has been considerable and provide guidance on further engagement in the future: ADB has approved 48 operations, including 28 sovereign guaranteed loans, 11 non-sovereign operations (NSO) and 9 Technical Assistance projects, amounting to US$7 billion with sovereign operations accounting for nearly 90% of the total approved amounts during the 2005-2017 period, and include policy-based lending (PBL) under a programmatic approach, a result-based loan, six multi-tranche financing facilities (MFFs), and one standalone project loan.
The ADB evaluation approach disturbingly though not surprisingly states that: "the sector is in a vicious circle of inefficiency, where nobody gets paid, and losses keep increasing due to lack of investments along the supply chain, causing brownouts across the whole country and unreliable supply that curtails economic growth.... Discos' inflows are insufficient to meet all their costs for a variety of reasons. First, some technical and commercial losses are not recognized by Nepra in determining consumer tariffs. Second, the tariffs notified by the government are below Nepra's determined tariffs; and although the government is required to compensate DISCOs with subsidies to cover the revenue shortfall arising from this tariff differential, these subsidy payments have normally been delayed or not paid at all." Additionally, Discos are not able to collect all billed amounts. Hence, the NTDC, some Discos, Gencos and IPPs are not able to meet their payment obligations in a timely manner, spreading the shortfall throughout the supply chain. As a result, available IPP generation capacity is underutilized and public Gencos and Discos cannot maintain or refurbish their facilities, which eventually are de-rated".
It is relevant to note that on 8 November 2013, a month or so into the EFF, IMF website noted that "the government has already approved a National Energy Policy to comprehensively address energy problems through demand and supply management, and to bring improvements in governance and transparency. The government is moving forward with the privatization or restructuring of 31 public sector enterprises to improve public sector resource allocation and limit poor performance." All that has been achieved to date is a rise in generation capacity with governance within the subsectors remaining largely unchanged.
The second sector where reforms were required but not implemented to this day is the tax structure. Ease of collection remains the basis of our tax system rather than widening the tax net. The World Bank in a recent update noted that "Pakistan's tax revenues have grown significantly (from 9.5 percent of GDP in fiscal year 2011 to 12.4 percent in fiscal year 2016) owing to federal and provincial efforts. Federal Board of Revenue (FBR) has removed discriminatory exemptions provided through SROs, resulting in a significant reduction in tax expenditures. The provinces' contribution to total tax revenue reached 0.9 percent of GDP. Nonetheless, to sustain these gains, the next level of reforms needs to be implemented. The objectives of such reforms should include the broadening of the tax base, increased tax compliance, and reduced administrative and taxpayer compliance costs. To achieve these, a comprehensive review of tax policy is required, assessing it against the key principles of neutrality, fairness, and transparency. In addition, a fully automated and able tax administration is imperative to take advantage of modern IT infrastructure that uses the available data to reduce the chances of tax evasion".
Additionally the IMF notes that, "post-18th Constitutional Amendment, the lack of co-ordination among different tax authorities has increased the compliance cost of taxpayers. There is a need to establish a co-ordination mechanism to resolve taxation issues between the federal government and the provinces and among the provinces". This is baffling as the FBR has failed to resolve this matter since the PML-N took over the reins of government.
It is relevant to note that on 8 November 2013, a month or so into the EFF IMF website noted that "fiscal consolidation remains a key component of the government's economic reform programme. The mission was encouraged by the government's efforts to enhance tax revenues, which slightly exceeded the programme target level. The mission also recognizes the authorities' tax administration reform measures and expects these to gradually deliver further improvement in revenue collections". The focus was therefore on a rise in revenue and not reforming the tax structure that remained unfair, inequitable and anomalous to boot.
However, in all the quarterly reviews under the EFF Finger gave the government numerous waivers for failing to implement the time bound structural benchmarks; by focusing on budget deficit reduction he is responsible for Dar continuing to compromise growth; and while the IMF reviews noted that the rupee was overvalued yet there was no benchmark, other than an exhortation, to adjust the currency's value or indeed to warn the government that the steadily rising massive reliance on foreign borrowing - Finger did acknowledge in a press conference that reserves were mainly debt enhancing - would have severe repercussions on the sustainability of the reserves - a fact that we in Pakistan live with today. In December 2017 IMF press release notes that "the move by the State Bank of Pakistan (SBP) to allow adjustment of the exchange rate in recent days is welcome. Continued exchange rate flexibility in the period ahead will be important to facilitate external adjustment in support of exports and economic growth. Alongside, fiscal discipline and an adequately tight monetary policy stance are needed to reverse the widening of external imbalances". The horse clearly bolted before the barn door was closed.
By December 2017 Finger claimed that: "Pakistan's growth momentum has continued to be favourable. We expect GDP growth at 5.6 percent this year, supported by improved security conditions, energy supply, infrastructure investment and agriculture". After sustained media reports backed by many independent economists that the growth projections were based on flawed data that could easily be challenged as data from various government and credible industry sources was not rationalized during the Dar years fell persistently on Finger's deaf ears. The IMF December statement however acknowledges what is obviously an unsustainable situation: "the current account deficit is expected to exceed the earlier forecast again by a wide margin. Surging imports have led to a decline in international reserves despite higher external financing. The increase in the fiscal deficit last year has added to these trends." A more credible redraft of the above press release would be "surging imports (due to an overvalued rupee) have led to a decline in international reserves despite higher external financing (or borrowing from abroad at market rates).
And the Fund states that "strengthening the economy's resilience will be important to maintain Pakistan's favorable growth momentum and ensure sustainable private investment and job creation in the medium term". One wonders what private investment the Fund is referring to? Surely a billion dollars of annual private investment is too low in an economy as big as ours. And if private investment and job creation is in reference to China Pakistan Economic Corridor then the IMF would be well advised to be aware that details of none of the projects financing terms under CPEC are publicly available.
-- Maintaining this positive trend will require strengthening the economy's resilience with greater exchange rate flexibility, fiscal discipline, and an adequately tight monetary policy stance.
-- The recent move by the State Bank of Pakistan (SBP) to allow adjustment of the exchange rate is welcome, and continued exchange rate flexibility will be important in the period ahead.
An International Monetary Fund (IMF) staff mission, led by Harald Finger, visited Islamabad during December 5-14, 2017 to conduct discussions on the first post-programme monitoring discussions since the end of Pakistan's Extended Fund Arrangement (EFF) in September 2016. At the conclusion of the mission, Finger issued the following statement:
"It has been a great pleasure for the mission to visit Pakistan and hold productive discussions in Islamabad for the first time in four years, which is reflective of the improved security situation in the country. The mission met with the Pakistan's economic team. The mission would like to thank the authorities for their hospitality and constructive dialogue.
"While economic growth has been accelerating and inflation remains subdued, Pakistan is facing important near-term economic challenges. Intercompany arrears in the power sector continue to accumulate and need to be addressed decisively. While the authorities have taken steps to address these challenges, greater efforts are required to prevent a further build-up of vulnerabilities and preserve Pakistan's hard-won macroeconomic stability.
"In this context, "A strong reform effort is needed to maintain external stability, ensure debt sustainability, and support higher and more inclusive growth in the medium term. This includes pursuing medium-term fiscal consolidation driven by accelerated efforts to broaden the tax base, strengthening the monetary policy framework and autonomy of the SBP, careful phasing in of new external liabilities to contain external stability risks, eliminating the losses of public sector enterprises, improving the business climate, and continued strengthening of the financial sector. In parallel, continuing to strengthen mechanisms for protecting the most vulnerable will be critical to support inclusive growth. In this context, continued expansion of the Benazir Income Support Programme will be important."