111 510 510 libonline@riphah.edu.pk Contact

Design flaws in IMF programme

The International Monetary Fund (IMF) programmes are regarded as well designed by other multilaterals (with routine consultation amongst themselves on not only synchronizing their policies but also ensuring that there is no duplication of effort in any borrowing member country), and creditor nations (due to IMF’s strict monitoring of all structural benchmarks/quantitative time bound conditions). The borrowing government blames the programme design for all harsh conditions, which, they further allege, emanate from severely flawed policies of previous administration(s).

Without exception, Pakistan’s recent finance ministers, (former multilateral staff members, qualified economists or accountants/bankers) accepted the policy framework of Fund programmes, and failed to successfully present any alternative framework consisting of in-house out of the box solutions based on rational economic grounds. Ishaq Dar did challenge Fund conditions but his bravado was gravely misplaced and brought the country to the brink of default – bravado premised on three flawed policies that violated Fund conditions: (i) controlling the interbank rupee-dollar parity that cost the country 4 billion dollars in lost remittance inflows; (ii) extending 110 billion-rupee subsidy to the rich exporters while 39 million Pakistanis were living under the open sky after the floods in the summer of 2022; and (iii) raising current expenditure from what was budgeted by a whopping 26 percent (revised estimates) which required a massive rise in borrowing from domestic commercial banks, a highly inflationary policy that crowded out private sector borrowing, contributing to negative 0.2 percent GDP growth in 2022-23.

A staff-level agreement (SLA) on Stand-By Arrangement (SBA) design was reached on 29 June 2023 after two major prior conditions were met: implementing a market determined exchange rate and revision of the 9 June 2023 budget passed by the assembly on 25 June.

The question is whether the SBA design consists of standard normal Fund conditions (similar to those in the previous twenty-three IMF programmes though the scale of harshness has increased manifold due to the deepening economic impasse cited by the Fund as a consequence of the failure of previous administrations to implement politically challenging conditions) or whether Pakistan’s economic team leaders convinced the Fund to adopt some in-house policies premised on prevailing domestic conditions? The answer resoundingly is the former in terms of the source of revenue and expenditure priorities. And the IMF staff’s litany claiming empathy for our poor, indicated by several references in the first review documents to protecting the poor and vulnerable, sounds patently as hollow as those of our repeat finance ministers, including the incumbent, given the agreed source of revenue, the budgeted priority expenditure and the insistence on implementation of time bound administrative measures that are crippling the capacity of 40 percent living below the poverty line to meet their kitchen budgets (leave alone their education and health costs) while the lower to middle income earners are being mercilessly pushed into ever lower socio-economic categories.

The 25 June 2023-24 budget envisaged an additional 215 billion-rupee Federal Board of Revenue (FBR) collections relative to 9 June budget projection. A comparison between the two documents reveals a 281 billion-rupees reduction in indirect tax collections, whose incidence on the poor is greater than on the rich, and a rise in direct tax collections, income tax, by 496 billion rupees. Sadly, what was ignored is the fact that the direct tax rise envisaged by the FBR is actually a rise in withholding taxes levied in the sales tax mode (an indirect tax) while dishonestly is being credited under direct taxes – a practice that the Auditor General of Pakistan strongly urged the FBR to desist from but apparently to no avail. The first SBA review report notes the government’s ongoing efforts to widen the tax net by taking punitive actions against the non-filers – possible through information available as a result of National Database and Registration Authority (NADRAs) sharing its data with FBR. Ignored is the on-ground reality: that all previous such efforts did raise the number of filers though not the actual collections by much because those not required to file returns (widows, retirees, students) filed their returns to benefit from the differential withholding tax rate applicable on goods and services between filers and non-filers. Needless to add the petroleum levy, itemised under other taxes, is budgeted to generate 869 billion rupees, another indirect tax burdening the poor more than the rich. These taxes sustain the pervasive elite capture, contribute to the rise in poverty levels to 40 percent, and with a sensitive price index of 44.65 percent for the week ending 18 January 2024, continue to push many a low to middle income earner below the poverty line.

SBP profit (under non-tax revenue) was projected at 1134 billion rupees in both budgets (with Dar’s critics perhaps unfairly arguing that irrespective of the autonomy bill passed by parliament in January 2022 Dar may have manipulated the SBP to manipulate its profit data). The first SBA review’s Memorandum of Economic and Financial Policies (MEFP) notes that “while our budget projected PRs 1113 billion in SBP dividend transfers, the realized amount fell short by PRs 141 billion due to variations in interest rates, exchange rates and volume of liquidity operations.” There is a discrepancy of 21 billion rupees between the amount budgeted in the 9 and 25 June budget documents and in the MEFP amount that raises the shortfall to 162 billion rupees though it could be a typographical error.

Another design flaw is with respect to two grave miscalculations: (i) projecting lower external inflows in the 25 June budget relative to the 9 June budget by 333.363 billion rupees – from 6.874 trillion rupees to 6.54 trillion rupees. This reflects Fund staff’s failure to project that the international rating agencies were unlikely to improve Pakistan’s rating (after the first review success), which accounts for around 6.1 billion dollars budgeted from foreign commercial banks and issuance of sukuk/Eurobonds not materializing during the first half of the current year; and (ii) not safeguarding against the possibility of not meeting the primary budget balance. A footnote in the first SBA review documents notes that: “a large bilateral disbursement occurred in mid-July following a period of rupee appreciation, the actual average quarterly exchange rate overstated the financing generated in domestic currency terms, leading the QPC on the general government primary budget balance to be missed. Going forward the TMU has been amended to evaluate external financing flows at actual exchange rates while the authorities commit to reporting external financing flows and applicable exchange rates at a more granular level.”

Current expenditure was raised by 24,895 million rupees in the IMF approved budget with the following changes: (i) mark-up on domestic debt was not amended however the failure of the government to procure external assistance led to a 24 percent rise in domestic borrowing July-November 2023 against the comparable period of the year before which will substantially raise the markup component of current expenditure to well beyond what was budgeted under IMF supervision. The money borrowed by the government is re-injected into the economy without any rise in productivity, a highly inflationary policy – a SBA design flaw which exclusively focuses on the discount rate as a means to dampen inflation rather than on this patently evident contributor to Pakistan’s inflation;  (ii) pensions for civilians (not military) were upped to 228 billion rupees in the revised budget against the 188 billion rupees noted in the 9 June budget no doubt understated by Dar initially but no upfront condition for pension reform has been stipulated; and (iii) subsidies were reduced by only 10 billion rupees while running of civilian government was reduced by one billion rupees, grants to others by 55 billion rupees though Benazir Income Support Programme (BISP) allocation was upped to 466 billion rupees against 450 billion rupees. In other words, the adjustments were insignificant and are a design flaw.

The federal Public Sector Development Programme’s in the 9 June and 25 June budgets are identical, an unrealistic 950 billion rupees – giving rise to the suspicion that the Fund staff accepted the economic team leaders’ suggestion that as in the past this would be slashed as and when the budget deficit target was breached. This approach does no service to the people of this country.

And finally, the Fund staff obsession, supported by politicians of all ilk in this country that privatization is the way forward, needs a revisit. Improving governance is not only about restructuring a state-owned entity or privatization but to assess/determine the need for: (i) tweaking related policies. K-Electric privatization has failed to achieve the desired results partly because of the policy of tariff equalization that requires subsidies, at the taxpayers’ expense, is budgeted in the current year at 171 billion rupees (with additional arrears of 127 billion rupees); (ii) whether the privatization will generate a monopoly and needless to add economic theory dictates that a private monopolist may raise prices to increase windfall profits; and (iii) the future stream of income, if any, be taken into account when setting the sale price of any entity.

To conclude, there are several design flaws but all cannot be laid at the doorstep of the Fund staff as the government’s negotiating team leaders – the finance minister and the Governor SBP – at the time of the loan approval and during each subsequent quarterly review, must be held accountable as signatories.

Anjum Ibrahim, "Design flaws in IMF programme," Business recorder. 2024-01-29.
Keywords: Economics , Monetary fund , Structural reforms , Commercial banks , GDP growth , Exchange rate , Tax collection , Domestic debt , Income Tax , IMF programmes , MEFP , FBR

Leave a Reply

Your email address will not be published. Required fields are marked *