According to well-informed sources, the Finance Ministry has proposed to the visiting International Monetary Fund (IMF) team to negotiate the 23-day macroeconomic targets (till end March 2011) and the IMF team currently on a visit to Pakistan has extended its stay. If the government is successful in meeting these new targets then the IMF must, it is proposed, reinitiate the fifth review latest by May with the objective of releasing the penultimate tranche prior to the end of the current fiscal year (30 June 2011).
This, such is the argument, would enable the federal government to meet its still to be agreed revised deficit targets, as the release of a tranche by the IMF would be tantamount to the issuance of a Letter of Comfort (LoC), which is a basic requirement of all the undisbursed but pledged budgetary support from other multilaterals, as well as bilaterals.
The last tranche release, as well as the distinct possibility of going on another IMF programme upon completion of the ongoing Stand-By Arrangement would, from the IMF's perspective, ensure that the government remains engaged in the process of implementing structural reforms that have to-date remained challenging. The crucial question for the IMF would be to determine what can the federal government possibly undertake in just 23 days, given that it is a terribly short timeframe during which implementation of structural reforms is simply not tenable.
This is especially so considering that the federal government has, reportedly, informed the IMF that it would be unable to implement the Reformed General Sales Tax (RGST) this year, a credible stance given that the government has, as yet, been unable to garner enough support to seek parliamentary approval for the relevant bill tabled in November 2010. However, the government has inexplicably assured the Fund that it would implement the RGST in the next fiscal year.
One would assume that at least four 23-day conditions maybe proposed by the Fund team. First and foremost, the IMF may agree to revise the target budget deficit of 5.1 percent of the Gross Domestic Product (GDP) to around 5.3 of the GDP. This is slightly lower than the government's request for 5.4 to 5.5 percent. This would be doable for the Finance Ministry if it dramatically pares down all further allocations to several ministries during the remaining four months of the current year and, importantly, succeeds in pressurising the provinces to show surplus budgets through more effectively taxing the income of the rich farmers (a provincial subject as per the constitution).
This would require that the existing farm tax be levied not on the size of the landholdings, but on the income from the landholdings, and all existing loopholes need to be plugged to ensure that collections under this head are commensurate with the income of the rich landlords. There is evidence that the Finance Ministry is engaged in both these actions and therefore the revised deficit target, if agreed, is likely to be met.
Second, the Fund would want some advance action on what it considers is the continued failure of successive governments in Pakistan to raise the tax-to-GDP ratio. In other words, the federal government would have to show that it has been able to raise taxes that do not constitute further burdening the existing taxpayers, but those who remain exempt.
Although the government is reported to have assured a move in this direction from April this year that appears to be unlikely given the fact that the latest proposal seeks to request a deferment of the RGST, a tax focused on increasing documentation with the long-term objective of bringing the large undocumented sector into the tax net which, in turn, would raise the tax-to-GDP ratio.
Third and equally importantly, the IMF would want the government to end its heavy reliance on printing money/borrowing from the State Bank. The federal government may be able to argue that once the fifth IMF tranche is released, which would lead to the disbursement of pledged assistance from other donors, the need to print money would necessarily evaporate.
And finally, the government would be required to end all subsidies, or at least make them more targeted, eliminate the inter-circular debt (which remains an issue even more than two years after the government committed to the IMF to eliminate it) and ensure that full cost recovery becomes the overarching objective.
This would entail not only raising utility rates in the short-term but would consist of increasing efficiency in the long-term that may include rightsizing of the labour force, strict adherence to the public procurement rules with exemplary punishment meted out to those who defy such rules and a management cadre, selected/appointed on the basis of merit. Some work on this has begun and the federal government is engaged in appointing members to the board of directors, who have the necessary qualifications and experience under their belt.
At the end of the day, or the end of the ongoing talks with the IMF, it would be an uphill task for the federal government to succeed in selling the idea of a 23-day deadline with specific performance targets. It is too short a time to even provide credible data, not until and unless the government allows the Fund team to meet with PML (N), PML (Q), MQM and ANP and thereby shows that there is a political consensus on the way forward. With the PPP no longer in coalition with the PML-N in Punjab and with the MQM restive again, it is doubtful if other political parties are on the same page as PPP.
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