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We, not IMF, should be blamed!

The IMF Mission is finally here and negotiations are under way. It is expected that the Miss-ion would be here until 20 November, or take a few days here and there, and probably the staff level agreement on a programme would be agreed.

People are looking for the successful conclusion of the programme and its continued success. However, there are voices opposing the programme, as they consider it a source of disruption and dependence on foreign institutions. One such view considers the Fund as part of the problem as it has not pressed Pakistan for reforms and has given frequent waivers from performance criteria and modified structural benchmarks emboldening governments to practice profligacy with impunity.

In a report published in this newspaper on 9 November, 2018, it has been alleged that the previous Mission Chief “formulated the Extended Fund Facility package for Pakistan that was found to be flawed in several respects: focused on higher revenue generation through raising taxes on existing taxpayers with little focus on widening the tax net, not taking account of heavy external borrowing by the Dar-led Finance Ministry to shore up foreign exchange reserves that accounts for the current account deficit reaching an historical high and not allowing the rupee to reach its market value that accounted for plummeting exports (exports during the EFF contracted from $25 billion in 2013 to around $20 billion in September 2016). The Mission Chief recommended 14 waivers when Pakistan failed to meet structural benchmarks and remained reluctant to insist on time bound actions. According to senior officials, one waiver after another during the mandated quarterly reviews under the EFF was not a good omen for Pakistan’s economy as it encouraged the previous economic team not to take the necessary undertake reforms. Reforms in the power sector made no progress under EFF as issue of line losses and power theft was not effectively dealt with and the entire reliance remained on increasing electricity tariffs; as a result the circular debt issue was exacerbated”.

This view has no basis in reality. Let us examine each element aspect of the accusations. First, the last mission chief had noted formulated the EFF package of reforms. He inherited a very strong programme when he took over from the previous mission chief in June 2015 and piloted it through completion. In fact, he displayed an equally vigorous, if not more, determination to implement the programme with full integrity and in the best interest of reforms.

Second, it is fallacious to claim that the programme “focused on higher revenue generation through raising taxes on existing taxpayers with little focus on widening the tax net…”. During the programme period (2013-16), FBR revenues increased from Rs 1936 billion to Rs 3112 billion, an increase of 61% over a three-year period. Was this achieved by simply raising the tax rates on existing taxpayers? The only notable rate increase was that of sales tax from 16% to 17%, an imperative which could not be avoided as the revenues had fallen to their lowest year-on-year growth of 3 percent in the previous year. The main reforms of tax system were two: (1) removal of SROs and its abandonment as an instrument of tax policy and (2) issuance of a minimum of 300,000 notices to prospective tax payers from FBR’s own data base from withholding taxes. These reforms were implemented with utmost integrity, diligence and commitment over a three year period. The fact that FBR revenues mattered no less than the actual outcome of the fiscal deficit, an “indicative target” was crafted to carefully monitor their progress mid-way through the programme and Fund asked for additional measures if needed to meet the target. At the close of the programme, End-June 2016, the indicative target was Rs.3108 billion and the actual outcome was 3112 billion, which exceeded the target.

Third, another myth is that the programme allowed (i) foreign borrowings for building reserves;(ii) historical high current account deficit; (iii) not allowing rupee to reach its market value; and, (iv) not being concerned with export decline from $25 billion to $20 billion. Briefly, much of the financing during the programme period came from IMF, World Bank and ADB(all concessional and the very reason for doing the programme) and some from the capital market, which was made possible after seven years as the economy was revived and foreign investors’ confidence was restored). The latter was only $3.5 billion. Against these borrowing, not only all repayments of past loans were made (including what was due to IMF) but reserves were taken to a historic high of $25 billion in End-September 2016. The claim that current account was historic high is not true as it was merely 1.4% or $3 billion at the close of the programme. Regarding rupee depreciation, the IMF constantly maintained that the real exchange rate was over-valued in the range of 12-23 % depending on the relative indices. Pakistan authorities were adamant that since exchange rate was not an instrument of policy within the programme and since all reserves accumulation targets (including upward revisions voluntary agreed by authorities) were met with handsome margins, the need for exchange rate depreciation was not warranted. Exports (fob) were 24.8 billion in 2012-13 and decreased to $22.0 billion, a decrease of about 11%. This was the result of decreased international commodity prices, as we sent more quantities at lower prices. But the country hugely benefited from lower petroleum prices as our import bill of petroleum sector was nearly halved despite rising quantities after October 2014. So during the programme period, the terms of trade turned favorable to Pakistan and strengthened our external sector account.

The claim that waivers were allowed whenever Pakistan failed to achieve structural benchmarks is also misconceived. Waivers are concerned with performance criteria and not structural benchmarks (SBs). Many critics have held waivers against the Fund, construing them as undeserved favours given to Pakistan. However, this is a mere propaganda devoid of any substance. Waiver is part of the approved methodology for a review under the programme. The Factsheet on IMF Conditionality describes the process of waiver of a Quantitative Performance Criteria (QPC) as follows:”If a QPC is not met, the Executive Board may approve a formal waiver to enable a review to be completed, if it is satisfied that the programme will nonetheless be successfully implemented, either because the deviation was minor or temporary, or because the country authorities have taken or will take corrective actions”.

Except for a small over-run of Rs 57 billion in the fiscal deficit target (brought down from Rs 2.2 trillion (8.2%) to Rs 1.3 trillion (4.6%)), all other performance criteria were met including reserves, domestic credit, borrowing by federal government from SBP and SBP foreign swaps/forward position and disbursement under BISP.

Waiver, when needed, was carefully examined as to its causes, its state in the following quarter, and, if required, agreement on adoption of corrective measures before presentation to the Board. Once satisfied, the Mission would first recommend completion of review to its Management and, after their approval, to the Board. It simply meant more time to complete not any reduction in the bar. Evidently, this is a fairly involved process and cannot be given on the sweet will of a Mission Chief. For SBs, there is no equivalent notion of waivers, rather timings of completing specific SBs are adjusted whenever warranted by the circumstances. As many as 51 SBs were completed (including elimination of SRO regime, improved public debt management, rationalization of gas and electricity tariffs, etc.) in the areas of fiscal, monetary, banking and finance, trade and energy. Of these, 22 actions required legislative efforts, 14 of them required enactment of full laws (including the Securities Act, the Futures Act, the Electricity Conservation Act, the PIA (Corporatization) Act, the Corporate Rehabilitation Act, the Deposit Insurance Act, the Credit Bureau Act, the GIDC Act, etc.), while 8 required amendments in existing law (most notably establishment of monetary policy committee under the SBP Act).

Whatever happened to the economy after the Fund programme was a result of complete reversal of policies and priorities pursued subsequently. If the Government chooses to abandon responsible economic management then there are no instruments available to restrain it. In two years 2016-18, fiscal deficit rose to close to 7%, current deficit 6%, SBP reserves declined from $20 billion to less than $10 billion, tax revenue growth plummeted to 8%, net external debt jumped from $57 to $72 billion. How can anybody hold IMF responsible for these outcomes which are an inevitable consequence of abandoning all that we practiced under its programme

Government would do well to focus on securing the programme, diligently performing under it, and as the FM has repeatedly vowed, and making it the last Fund programme for Pakistan.

Waqar Masood Khan, "We, not IMF, should be blamed!," Business Recorder. 2018-11-14.
Keywords: Economics , Level agreement , Quarterly reviews , Tax payers , Market value , Corrective measures , Petroleum prices , GIDC , PIA , IMF