IMF review: does it support Dar’s claims?

This is the second of a two-part series discussing the IMF third staff report as well as the Letter of Intent submitted by the government with respect to commitments made by the government to the Fund and their likely impact on sectors and the general public.

The third International Monetary Fund (IMF) staff review noted that one of the key risks to the 6.64 billion dollar Extended Fund Facility (EFF) is slippage in policy implementation, which could depress growth. The question is how many new conditions were added to the EFF programme reflecting IMF concerns with respect to the relevant sectors due to slippages or other factors.

Three adjustors were requested and granted indicating failure to meet conditions that were earlier agreed but could not be considered as non-compliance given that the IMF was satisfied that efforts to implement reforms were under way: (i) floor on Net International Reserves adjusted upward; (ii) ceiling on Net Domestic Assets adjusted downward; and (iii) ceiling on consolidated overall budget deficit adjusted upward.

The question is what, apart from a massive rise in foreign borrowing that shored up our foreign exchange reserves though, as per the IMF, reserves are still low, enabled the government to meet its budget deficit target?

Most significantly the federal government was enabled to meet a significant portion of its budget deficit target of 5.8 percent of Gross Domestic Product (GDP) through generating an eight times larger than budgeted provincial surplus. This has been documented as subsequent to a decision taken in the Council of Common Interest and was a pre-loan condition to the EFF. Dar has earmarked 289 billion rupees in the budget 2014-15 as provincial surplus – 106 billion rupees more than the revised estimates of last year and a whopping 266 billion rupees more than what was actually budgeted last year. Provincial surplus is not defined as federal surplus, which is the difference between revenue and expenditure but as the provincial governments deposits with the State Bank of Pakistan (SBP). To further clarify, a SBP notification acknowledges that there has been a reclassification of provincial governments’ overdraft accounts and they are now “recorded on the liabilities side of SBP sectoral balance sheet. Therefore, they were netted out against their deposits. Following the recommendation of MFSM (Monetary and Financial Systems Manual that is approved by the IMF), these overdrafts have been reclassified against Advances to Provincial Government under Assets”. And viola! The provincial surplus is generated which may not be on actual basis, which is the basic premise of government accounting, and instead could well allow for data manipulation through stopping releases to provinces till the accounting period is over and later releasing the amount.

In addition the SBP notes that the “Provincial governments and the Government of Azad Jammu & Kashmir may also borrow directly from SBP by raising their debtor balances (overdrafts) within limits defined for them. The interest rate charged on the borrowings is the three-month average yield of 6-month MTBs. If the overdraft limits are breached, the provinces are penalized by charging an incremental rate of 4 percent per annum”.

Some disturbing data from the SBP website is as follows: total provincial government borrowing from SBP and its monetary impact up to July 1, 2014 is negative 102.7 billion rupees with Punjab’s share at negative 53 billion rupees, Khyber Pakhtunkhwa’s negative 27.5 billion rupees, Balochistan negative 15 billion rupees and the lowest of all Sindh with negative 6.8 billion rupees. New provincial government’s borrowing from commercial banks for the same period was a total of negative 37.9 billion rupees. Claims on provincial governments and liabilities to provincial governments up to May 1014 as noted on the SBP website are 258.8 billion rupees and 332.8 billion rupees respectively giving net claims at 74 billion rupees – around 109 billion rupees less than the provincial surplus declared in the 2014-15 federal budget documents. It is little wonder that Ishaq Dar was quiet about the massive rise in provincial surplus as declared in the budget documents. It is also little wonder that the IMF time and again urges the government to enhance central bank’s independence, which its staff claims is “key to an improved monetary policy framework.” However, that is simply not likely under Dar-led Finance Ministry.

Four new structural benchmarks were proposed and accepted. These included: (i) improve SBP’s internal operations by (a) establishing advisory monetary policy committee to advise the Board on policy decisions (though there is concern in the SBP that this committee may be used by the Finance Ministry to impose its will through its members), (b) establish a Board committee to centralize and oversee risk management activities across the bank, and (c) begin publishing summaries of monetary policy proceedings of the Board meetings and monetary policy committee deliberations with an appropriate lag to ensure little or no interference from the Ministry of Finance; (ii) fill vacancies of Nepra Board by end of this month – not an issue for the government, (iii) offer minority shares in UBL and PPL to domestic an foreign investors which is again likely; and (iv) approve an administrative order to consolidate the responsibilities of public debt management in the debt management office.

Dar’s commitments under prior actions – prior to the next staff review – are threefold: (i) subsequent to an audit of the energy sector stock of 240 billion rupee arrears (end-March) at the Power Sector Holding Company Limited in the syndicated term credit finance will be serviced through either inclusion in the tariff notification for last year failing which a suitable surcharge would be levied – thus either way tariff would rise and loadshedding duration may not decline. These measures, if implemented, would have far-reaching socioeconomic implications which may transform the summer of our public discontent (marked by anger at the number of hours of loadshedding in major cities of the Punjab) into support for political parties seeking an audit of the 2013 elections or new elections; (ii) eliminate majority of statutory regulatory orders and convert the remainder into regular legislation. It may be recalled that past efforts by the previous governments in this regard proved unsuccessful due to the pervasive influence of those who benefit from the SROs however, one would hope that Dar does succeed in this endeavour, but unfortunately as the country has learned budgets become obsolete almost on the first day of the new fiscal year.

Thus there is a lot of jugglery of data as expected as well as an agreement to undertake tax reforms that have not been delivered (either in terms of rising the tax to GDP ratio, or broadly basing the tax system or ensuring that audit of rich taxpayers does generate more income tax) which probably accounts for the IMF staff report’s main theme throughout the document: do more – do more to grant autonomy to the SBP, do more to allow the provinces to use their surpluses for social sector development, do more to improve the underperformance of FBR, do more to reform the energy sector, do more to ensure pro-poor policies, do more to reduce inflation, do more to… alas the list is exhaustive indeed. If this is support for Dar’s policies then there is a need to challenge his capacity to evaluate analytical reports compiled by the Fund – reports based on data shared by Ministry of Finance with the Fund.