Flawed interpretation

Dar has been particularly insistent in proclaiming that his skills on the negotiating table with particular reference to the International Monetary Fund (IMF) got Pakistan a particularly favourable deal with the Fund on conditions that he dictated. Is Dar’s claim credible?

Two factors need to be taken into account before responding to this question. First, the range and rigidity of conditions imposed by the IMF on any borrowing country are in direct proportion to the state of the debtor country’s economy. Pakistan at present is in the throes of stagflation with all key macroeconomic indicators requiring politically challenging policy decisions and, coupled with the failure of the previous government to implement the agreed reforms, it was expected that conditions under the Extended Fund Facility (EFF) would be particularly harrowing. And second, conditions are benchmarks that are clearly and unambiguously defined and are typically time bound. A look at the Letter of Intent (LoI) signed by Dar, a prerequisite for the Fund Board approval of any lending facility, that was placed on the Ministry of Finance website a week earlier than placed on the IMF website, reveals few specific benchmarks with respect to the IMF programme including the budget deficit, expenditure reduction and revenue generation targets. However details of benchmarks were made available in a 16-page statistical appendix that Dar did not affix on the Ministry of Finance website.

The LoI clearly identified five prior actions and structural benchmarks under the 6.64 billion dollar EFF which were complied with according to documents on the website five days prior to the Board meeting, two benchmarks are required to be complied with by September, one by November, six benchmarks are required to be complied with by the end of December, one by end March 2014. Those implemented five days prior to the IMF Board meeting were: (i) net purchase of $125 million by the SBP in the foreign exchange spot market from July 1, 2013; however the rupee’s slide compelled the Prime Minister to order an intervention which is in violation of the agreement with the IMF; the rupee slide is attributable to the loan amount being enough to pay-off past loans with no cushion provided with respect to foreign exchange reserves that would have provided the necessary support to the rupee; (ii) new higher tariffs have already been notified, weighted average tariffs increased and notified on industrial and commercial, bulk and AJ&K energy consumers and subsidy on second group (not the most vulnerable has been reduced); (iii) implement a series of fiscal adjustment measures (including those in the budget) totalling 2 percent of GDP on annualised basis; this would be achieved through measures that are to be implemented by end December this year which would include developing and launching initiatives to enhance revenue administration for sales tax, excise and customs similar to that prepared for income tax and levy on gas to generate 0.4 percent of GDP fiscal savings; such measures may lead to analysts declaring them as a mini budget and require slashing federal development budget by 120 billion rupees and provincial development budgets by 201 billion rupees. However, the recent decision to withdraw all budgetary measures pertaining to sales tax on unregistered persons from 17 to 1 percent implies that the attempt to document the economy has been deferred yet again – another commitment to the Fund reneged on that may imply higher tax on existing taxpayers.

Additionally, the statistical annexure also reveals more realistic figures relative to budgeted growth rate (2.5 percent as opposed to the budgeted 4.4 percent), revenue generation (3579 billion rupees as opposed to the budgeted 3616 billion rupees) and higher non-tax revenue (853 billion rupees as opposed to the budgeted 813 billion rupees). Data suggests that collections have already risen by 127.9 percent as a consequence; (iv) impose a balanced budget requirement on provinces and agreement to save additional revenues generated. Given that all provinces showed a deficit in their budgets for the current year it is not clear if an agreement has been reached in principle with the exact modalities of saving additional revenues yet to be worked out; and (v) 10,000 notices based on large potential fiscal liabilities have been issued, however the positive impact on revenue is still unclear.

By end September the government has to enact a deposit protection fund act no doubt designed to forestall the loss of savings due to collapse of a financial entity (a lesson learned from the West with banking collapses) and develop and approve public sector entities reform strategy for 30 firms out of the 65 approved for privatisation by the Council of Common Interest (CCI). It is unclear which entity is preparing these plans as the Privatisation Commission has told Business Recorder that the entity itself would develop its reform strategy while at the same time there is concern over the proposed methodology of privatisation with many gearing up to take the matter to court. At this point in time, the government does not appear to be taking any one on board with respect to its plans focuses on easing public concern that the sale of PSEs would not be tantamount to selling the family silver at throwaway prices.

With respect to the energy sector the government is required by end November to hire a professional audit firm to conduct a technical and financial audit of the system at all levels of the energy sector including the Power Sector Holding Company Limited which was established during the tenure of Shaukat Tarin as Finance Minister and was used to park the circular debt. The government also intends to make Central Power Purchasing Authority operational by separating it from the NTDC, hire staff, issue CPPA rules and guidelines and initiate payment and settlement system. Most of these measures relating to the energy sector were identified in the 2008 LoI during Tarin’s tenure but were not implemented by the PPP-led government making one wonder how Dar’s conditions are different from those agreed to by Tarin.

By end December, the government has also agreed to prepare a detailed plan to achieve compliance of all banks that fall below the minimum capital adequacy requirement and a detailed plan for recapitalisation, consolidation or liquidation of 9 banks that fall below the minimum capital requirement, enact security bill and amend penal code and code of criminal procedures 1898 which appears doable.

By end March, the government has agreed to enact legislation to make the SBP autonomous, a legislation that is unlikely to make any difference as this condition has not been complied with in the past and to privatise 26 percent shares of PIA to strategic investor by end-June of 2014 which again may be subjected to litigation and employee resistance.

And finally, the reporting entities as well as requirements as agreed in the Technical Memorandum of Understanding (TMoU) are simply astonishing and unprecedented in the history of this country and include (i) reporting not only by Ministry of Finance and State Bank of Pakistan which is the usual practice but also by the Ministry of Water and Power as well as the Federal Bureau of Statistics which is not usual; and (ii) daily reporting of several key indicators including foreign exchange market, SBP operation against the domestic currency in swap/forwards, daily interbank repo volume and interest rate.

Did Pakistan get a better deal under Dar than under say Tarin? One would have to disagree, the conditions with respect to revenue generation, development expenditure cuts as well as the energy sector are similar to those identified in the 2008 LoI but this time around the IMF has challenged the claims made in the budget and extended a loan that was simply not enough to ensure a minimum level of reserves that would have provided the necessary cushion to the rupee. The result: an eroding rupee value that had to be arrested through market intervention.