The willing lender

Pakistan and the IMF have started discussions for a fresh round of IMF financing. This will be the twelfth IMF programme in over two decades. Pakistan holds the unique distinction of not only being one of the most frequent borrowers of the IMF, but also one with the worst track record of programme implementation. Despite repeated poor performance by Pakistan, the IMF has generously provided financing – with the same conditions, but different wording each time.

For over two decades, the Pakistan-IMF relationship has been a merry-go-round journey, with the IMF jumping on the merry-go-round ever so often – knowing fully well that it will continue going round in the same circle. The IMF became a willing ‘lender of first resort’, rather than its mandated role as a responsible ‘lender of last resort’.

IMF financing has increased public debt, without any commensurate benefit to the people of Pakistan. The Pakistani elite has benefitted from IMF bailouts, which have protected its lifestyles and tax-evading behaviour. On the other hand, the majority of the people were saddled with having to pay back the debt through indirect taxes. The IMF is equally culpable for Pakistan’s debt overhang. It knew fully well that the governments it lent to were run by elite white-collar crooks and unconstitutional military dictators, and that there was complete absence of accountability for poor programme implementation.

Whereas every Pakistani knew that the governments in power were not serious about reforms, the IMF conveniently ignored the obvious. The IMF has rewarded poorly performing governments and failure. By repeated undemanding bailouts, it allowed successive policymakers to take the soft option of borrowing, rather than the hard choice of raising taxes from the elite.

Pakistan has suffered from the absence of ‘accountability for results’ within the relationship between the IMF (and other international financial institutions) and poorly-governed borrowing countries. There is no personal penalty for irresponsible lending within international institutions or reckless borrowing by senior policymakers – no lending (or borrowing) agency management or staff has ever been fired for bad lending (or bad borrowing). While Pakistan sank, IMF mission chiefs got promoted.

As IMF negotiates the new programme, it must incorporate lessons of failure in its upcoming programme and not sacrifice sound policy in the interest of expediency. As a minimum, it must insist on some ‘game changing’ reforms. As far as tax reforms are concerned, the programme must include:

(a) legislative and administrative actions to overhaul the Federal Board of Revenue (FBR), especially focusing on establishing an independent authority whose board and senior management is appointed through a transparent and depoliticised method; empowering senior management to undertake institutional reforms to convert the FBR from an extortionist and corrupt organisation to a high integrity ‘customer-friendly’ agency; changing FBR rules to eliminate harassment tactics, with stiff penalties for frivolous and unsubstantiated tax notices; major downsizing to get rid of corrupt and incompetent staff;

(b) removal of all tax exemptions, and establishing a low uniform import duty to get rid of the corruption-ridden cascading tariff structure;

(c) uniform VAT at all levels and on all economic activities;

(d) wealth tax to capture the trillions of rupees of wealth created by rising real estate prices and in the stock market;

(e) audit of tax returns of all elected and senior civil, military and judicial officials. This would set the ‘tone at the top’ and provide the FBR the moral authority to audit tax returns of the elite in the private sector;

(f) audit of tax returns of all those taxpayers whose bulk of reported income is from agriculture, stock market, real estate or foreign remittance. This would plug a major source of tax evasion;

(g) presumptive tax notice to the millions of household and commercial energy consumers, whose annual electricity/gas bills are a clear indicator that their annual income is above the tax-filing threshold.

Expenditure allocation and management needs to be overhauled to send a clear signal to taxpayers that their taxes are wisely spent. Action in this area must include establishing an independent commission which would recommend to parliament, within 60 days, elimination of wasteful current and development expenditures (including in the defence establishment), downsizing of government and closure of redundant agencies; mechanisms to enhance public oversight on expenditure decisions; monetisation of perks and privileges of elected and government officials, to eliminate the ‘entitlement mentality’.

The following measures must be included in the programme to reduce and address the debt overhang: (i) a credible plan to reduce fiscal deficit to four percent in three years; (ii) revising the flawed Fiscal Responsibility Law to change the debt ceiling from debt-to-GDP basis to debt service-to-tax revenue basis, with criminal and civil penalties on the finance minister for violation of the ceiling; (iii) revision of the unsound National Finance Commission (NFC) Award which has led to bankruptcy of the federal government.

The NFC transfers must include a transfer category linked to increase in provincial taxes; (iv) changes in the State Bank of Pakistan (SBP) Act and banking laws to provide complete autonomy to the SBP to eliminate its subservience to the Ministry of Finance and strengthen its board’s composition and authority; and establish legally binding limits on commercial bank financing of government.

The programme must require an overhaul of untargeted subsidies through the following actions: (a) shifting of all consumer subsidies – electricity, gas, fertilizer, food items, etc – to the provinces, so that they decide who should be subsidised (within the province).

The federal government should only fund the National Income Support programme, and any subsidy to Fata on account of war (b) rationalisation of electricity tariffs and petroleum and consumer gas prices. As a minimum, fertiliser factories and CNG stations should be charged full price for gas, and well-head gas and petroleum prices should be raised to cost of imported energy.

The programme must include a timetable, and credible upfront restructuring and downsizing actions to privatise all SOEs within a 2-3 year period. A necessary upfront action should be the removal of SOEs from control of line ministries, and government officials from SOE boards.

The above actions are necessary to overcome the fiscal crisis and strengthen macro-economic management. It is time the IMF acts like a responsible doctor treating cancer, rather than continuing to lend like the National Bank of Pakistan.

The writer is a former operations adviser at the World Bank.Email: fffhasan@gmail.com