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The IMF came a calling

The International Monetary Fund (IMF) mission chief for Pakistan Harald Finger arrived in Pakistan for the final day of the seventh review and thereafter held a joint press conference with Federal Finance Minister Ishaq Dar this week past. The two men proceeded to announce that the seventh review talks had been successful and implicit in this announcement was a tacit commitment to release the eight tranche under the 6.64 billion dollar Extended Fund Facility (EFF).

The Finance Minister, as has become the norm, defined the success of the talks and the projected disbursement in June as a positive development and claimed that this was the first time that any Pakistani government had reached the stage of the seventh review. In the previous 20-odd programmes that Pakistan had with the Fund, making us a perennial borrower, this is the second programme under Dar’s less than four years as the Finance Minister in the country’s history – (i) 7th November 1998 to 12th October 1999, (ii) 31st March 2008 to 15th May 2008, and (iii) June 2013 to-date. Once foreign exchange reserves were strengthened former Pakistani governments abandoned programmes less than half way through the programme and forsook agreed reforms as they were politically challenging. In the eyes of local and international economists, this trend is one of the main reasons why, even during military dictatorships, no meaningful reforms were implemented. Specific sectors of concern were and remain power and tax sectors as well as social sectors.

In 2010, around one year and a half after approval of the Stand-By Arrangement on 20th November 2008 the Fund cancelled the programme due to failure of the PPP-led coalition government to undertake tax and power sector reforms. That clearly has not happened this time around. Thus Dar’s statement that IMF has given a vote of confidence for the reform path embarked on by the government is legitimate to that extent.

The question however arises as to whether the government embarked on a reform path to the satisfaction of the Fund staff? Four factors need to be highlighted in this regard. First and foremost, the IMF under the ongoing programme has begun to dictate prior conditions with political implications to the release of the tranche. When aBusiness Recorder team asked Finger whether this was unusual given that in the past prior time bound conditions were stipulated only at the start of a programme and subsequently adjustors were negotiated and applied to account for any failure to meet these conditions before the release of a tranche he responded in the negative. However facts in Pakistan’s history at least prove otherwise.

Secondly, the prior conditions are now focusing not on reforms that are required in our power and tax sectors in particular and governance in general but on totals. Thus for example fiscal measures are focused on a specific amount of revenue (which accounts for increasing reliance by the Dar-led Finance Ministry on the levy of withholding tax including reliance of over 20 percent on taxes from petroleum products whose incidence on the poor is greater than on the rich) and on a higher applicable rate on non-filers as opposed to filers which those operating in the undocumented sector are more than willing to pay as non-filers. Or in other words, little work has been undertaken to improve our tax to Gross Domestic Product (GDP) ratio which remains one of the lowest in the world. Similarly, the power sector continues to operate at well below capacity due to the circular debt (with a 50 percent time bound reduction agreed with the Fund staff for next year according to Finger) but again time will tell if this is doable as major governance reforms are required.

Thirdly, the Fund staff for the first time gently chided Dar on his definition of foreign exchange reserves. Finger during the joint press conference stated that the Fund’s definition of foreign exchange reserves does not include 5 billion dollars held by commercial banks of private individuals; and hence the 17.5 billion dollars cited by Dar is in reality 12.5 billion dollars held by the State Bank of Pakistan (SBP) equivalent to three months of imports. And finally the Fund is supporting legislation that seeks to make the State Bank of Pakistan (SBP) autonomous in letter and spirit and is pressurizing the government to include tax evasion under the proposed anti-money laundering act (with heavier penalties and punishment for tax evaders) with the government having committed to legislating the two by the end of June 2015. When the Business Recorder team raised the issue of the incumbent Finance Minister’s opposition to making the SBP autonomous in spirit, Dar opposed such a bill during the tenure of the former government as a member of the senate, and political difficulties that the government is likely to face in making tax evasion punishable under the anti-money laundering act Finger said that the Fund does not expect changes in the short-term.

Finger informed the Business Recorder team that the staff level talks with the government have been successful and the eighth tranche of 506 million dollars would be released after the Fund’s Board of Directors approves the seventh review scheduled for 26th June. This is well after the budget is announced in parliament and approved given the PML-N strength in parliament today. In other words, the prior conditions would all be part of the budget 2015-16 and Finger hinted that these would be related to fiscal and Gas Infrastructure Development Cess (GIDC) conditions. In this context the government summoned the national assembly today to present the GIDC bill for approval. Failure to meet any of these targets would imply another mini-budget (as happened before the release of the seventh tranche) though the lower international price of oil enabled the government to do so less painfully than would otherwise have been possible.

Sceptics in Pakistan however point to the lack of applicability of the budget document even on the first day of the start of the new fiscal year. The revised revenue of the previous year is overstated, partly due to reliance on advance taxes by large taxpayer units and partly due to misplaced optimism year after year at the time of the ending year’s budget, current expenditure is understated with subsidies (an irritant for the Fund) exceeding budget estimates (in the last fiscal year budgeted subsidies exceeded the revised estimates by over 70 percent – budgeted amount was 240 billion rupees with revised estimates of 323 billion rupees).

In addition, pressure groups on which higher tax is imposed would be out on the streets and if past precedence is anything to go by the government would be compelled to withdraw some of the tax measures.

To conclude, the budget document would meet the fiscal targets of the Fund but whether these targets would be met by the end of the year is a dicey prospect, again if past precedence is anything to go by.

Anjum Ibrahim, "The IMF came a calling," Business recorder. 2015-05-18.
Keywords: Economics , Economics issues , Economics policy , Perennial borrower , International economists , Military dictatorships , Social sectors , Political implications , Gross domestic product , Foreign exchange reserves , Budget document , Pakistan , GIDC , SBP , GDP , IMF , PPP