The International Monetary Fund’s (IMF’s) analysis and prescriptions in the second and final review document under the Stand-By Arrangement (SBA) dated this month are to carry forward to the next programme on which negotiations are currently underway.
This was unambiguously stated in the SBA final review documents: “SBA recognized that resolving Pakistan’s structural challenges will require continued adjustment and creditor support beyond the program period.
In this regard the authorities’ interest in a successor arrangement is welcomed to anchor policy adjustments in the coming years, restore Pakistan’s medium term sustainability and pave the way for strong and inclusive growth.
“ The disturbing fact is the lack of any attempt by the Fund staff to independently evaluate its SBA programme design, and perhaps even more disturbingly for the current economic team leaders to accept that design as, at best, a fait accompli and, at worst, actually endorse the design.
The question is should this be a source of foreboding for the general public and by extension the stakeholders?
The SBA document projections of key macroeconomic indicators for the current year and projection for next fiscal year indicate that the general public cannot look forward to any easing of the ongoing economic impasse: (i) budget deficit for the current year is projected at an unsustainable negative 7.4 percent as well as for next year – with serious inflationary implications that are simply ignored by the Fund staff; (ii) FBR collections are projected to rise by 17.85 percent next year compared to this year and this only after the current year’s agreed target is reached because the agreement is that any shortfall - there was a shortfall of 63 billion rupees in April - will require the activation of agreed contingency measures that include higher duties on cigarettes, fertilizers, sugary drinks etc. – all in the indirect tax mode whose incidence on the poor is greater than on the rich.
Tax to GDP ratio is projected at 10.6 percent this year to rise to only 10.7 percent next fiscal year and one would assume if past precedence is anything to go by that the onus of the rise in revenue would be borne by adjusting the almost 70 to 80 percent reliance on existing indirect taxes; (iii) current expenditure will rise by 15 percent next year, with interest on domestic debt rising by 17.1 percent and on foreign debt by 15.4 percent. One can only hope that the government slashes current expenditure through voluntary sacrifice of all public sector recipients – in terms of no salary raise, minimal procurement and pension reforms; and (iv) defense and subsidies (both lumped under current expenditure) would be contained at 1.7 and 1.2 percent of GDP respectively next year as well – a positive containment if achieved.
An IMF prescription, focusing on high discount as an effective anti-inflationary tool, applies to many developed economies but not to Pakistan’s.
In April there was a little under 5 percentage point differential between the discount rate and Consumer Price Index which includes imported inflation (rather than core inflation which is non-food and non-energy prices) - discount rate 22 percent, Consumer Price Index (CPI) April 17.3 percent, core inflation April 13.1 percent.
The net outcome of this policy has been a raise in capital costs of the large scale manufacturing sector leading to a steady decline in the growth of private sector credit with a commensurate decline in private sector output.
The GDP growth, higher than last year, is linked to higher government consumption (financed mainly from borrowed funds) and public consumption (sourced to lower inventories rather than higher output).
The Fund’s prescriptions on the two worst performing sectors of the economy – power and tax collection – and the raise in the quarterly stipend of the Benazir Income Support Programme (BISP) should raise some serious prescription related red flags.
The agreement with the Fund under the recently concluded SBA was to (i) rebase tariffs on annual basis, (ii) quarterly tariff adjustments, (iii) release of budgeted subsidies and (iv) anti-theft efforts.
All these measures raised tariffs for the consumers and the anti-theft drive should have provided some relief yet 80 billion rupees generated since 7 September 2023 was a drop in the ocean, given the circular debt of around 2.5 trillion rupees.
Fund staff, perhaps in an attempt to appease major donors, identified five measures out of which only two are doable and can be supported: moving captive power demand to the grid, and continuing to convert publicly-guaranteed PHPL debt into cheaper public debt.
The other three are undoable prescriptions to restore energy sector economic viability that so claims the report require strong cost side reforms. Firstly, continuing efforts to improve transmission infrastructure, including for better integration and expansion of renewable energy capacity.
Pakistan has an obsolete transmission network unable to vacate more than half of the current generation capacity and its improvement would require billions of dollars that the country simply does not have at this time.
In addition, expansion of renewable energy, solar, by the upper middle to the rich income groups, through a net metering system has led to plummeting revenue of Discos making full cost recovery from the existing poorer sections of society even more of a challenge.
Shehbaz Sharif has directed Nepra and Power Division to prepare a summary to convert existing net metering regime to gross billing (separate rates for import and export of units, create separate tariff category, revision of buy back rates by nearly 10 rupees; amendment of net metering regulations; and a dynamic formula to determine a reasonable pay-back period).
Second, improving DISCO performance via either privatization (proceeds are projected at zero for the next few years under this head) or long-term management concessions.
What is required is to compel the government to abandon large budgetary injections under the head of tariff equalization subsidy – an allocation that has been made annually to the privatized K-Electric as well.
However, the Fund prepared a graph of total fiscal cost of the power sector which includes TDS (including special subsidy packages – farm, industrial, etc) and repayment of arrears to IPPs and GGPPs and amortization of the PHPL debt and one would hope it is the first step in right direction.
And finally, revisiting, where feasible, the terms of power purchase agreements, a suggestion that was proactively pursued and rejected by the power plants set up under the umbrella of the China Pakistan Economic Corridor (CPEC) though those set up under the 1994, 2002 and 2012 power policy have largely been renegotiated. Shehbaz Sharif has directed the relevant staff to revisit these negotiations but this is unlikely to bear fruit.
What is not considered in the report is an insert referring to the very high taxes, estimated at 40 percent of a bill, imposed on electricity.
However, the Prime Minister has tasked the Finance Ministry and the Federal Board of Revenue to review overall taxes on electricity consumers and submit a plan for direct recovery from relevant sectors instead of raising tariffs for consumers.
The other major poorly performing sector relates to tax collections and FBR. The report refers to the need for strengthening revenue mobilisation through tax policy reforms and enhanced revenue administration and noted the following: (i) scheme to register retailers remains unimplemented with only 75 out of 3.2 million traders having registered till the deadline of 30 April.
Negotiations are ongoing; however, it is not yet clear whether an agreement will be reached and if not whether there will be countrywide strike action that may cripple the country’s supply system, or whether some watered down scheme would be implemented; (ii) Fund staff noted that smuggling and clandestine production of tobacco continued in spite of mandatory implementation of track and trace system and recorded the intent to expand this system to sugar fertilizer and cement (items smuggled to Afghanistan) with an obvious question as to the likely success next fiscal year.
And noted an additional 1.1 million filers but the question is how much additional revenue was generated from these new filers as previously the rise in filers does not reflect a significant rise in revenue as those exempted from filing (students, widows’, pensioners etc.) opted to do so to benefit from payment of lower withholding tax on purchases for filers; (ii) Compliance Risk Management has identified only 39 high risk cases with 31 audited and 40 billion rupees generated though one would hope that the amount it cost to generate this amount is majorly less than the amount generated; and (iii) plans to transform FBR into a semi-autonomous revenue authority were delayed as an international consulting firm will be engaged for final reforms. This is baffling because the bulk of taxes are collected by withholding agents, and two there are multiple detailed studies, domestic and by international consultants, gathering dust that identify minutely the measures to increase tax collections based on ability to pay principle. Fund appraisal however noted that “additional efforts are also needed to meet the SBAs revenue administration goals.”
And finally, the government raised allocation for BISP per beneficiary per month by 3500 rupees per month (as opposed to 2916 rupees per month before) effective 1 January 2024 – a raise that does not go far enough to accommodate the rising number of beneficiaries as large-scale manufacturing continues to register in the negative territory, indicating closures and rising unemployment or to sustain the quality of life with the CPI of 17.3 percent.
To conclude, one would hope that there is a revisit of the SBA programme design however given that after the Extended Fund Facility’s combined third, fourth and fifth review (April 2021) the Fund has increasingly exhibited lack of any flexibility in terms of phasing out the harsh upfront conditions this appears highly unlikely.
Copyright Business Recorder, 2024
Comments
Comments are closed.