Each quarterly review of Pakistan's performance under IMF's Extended Finance Facility (EFF) points to public debt exceeding its target and tax collection remaining below its target. The ninth review again pointed to these failures - a trend manifesting that while Pakistan's government isn't bothered about rising wasteful expenditure, it imposes controversial taxes that fail to deliver.
According to the latest review, fiscal deficit exceeded its target by Rs 23 billion (because federal tax collection was Rs 40 billion below target) and State Bank of Pakistan's net domestic assets exceeded their target by Rs 172 billion due to a higher public borrowing. However, now the IMF has sought implementation of several corrective steps but in unrealistically short timeframes.
A positive aspect of these corrective steps is that they come with observations over the flawed measures adopted by the government, eg, taxing the banking transactions of non-filers of tax returns which expanded the undocumented economy, and the Voluntary Tax Compliance Scheme - Prime Minister's New Year gift for the traders community - which reflects a failure to nab tax evaders.
Of the seven corrective measures (termed Structural Benchmarks), one requires the set-up of a comprehensive monitoring system for tax audits with quantitative performance criteria, (ie, number of risk-based audits), as well as qualitative audit indicators. This is nothing new; this critical gap has been highlighted time and again by commentators in the media.
That entities acting as collectors of indirect taxes collect these taxes don't surrender bulk of the collected taxes to the FBR is a reality accepted by the FBR. While this distortion adds to inflation, it doesn't lead to higher tax collection. What is surprising is the fact that the IMF didn't make imperative the undoing of this major distortion much earlier.
IMF's insistence on amending the Penal Code 1860 and the Criminal Procedures Code 1898 (by end-January 2016) to improve governance in the power sector too, seems a reaction to Nepra's 2014-15 report that pointed to the dubious billing and inflated power generation cost reporting practices in vogue in the power sector that is dominated by the private sector.
A much tougher task that the IMF wants accomplished by end-January 2016 is determining multi-year tariffs for Iesco and Lesco - Discos the government plans to privatise this year. Given the grave uncertainties about oil and gas prices in the medium-term, will Nepra be able to design a pricing formula on realistic basis, is a million dollar question.
On privatising the loss-making state-owned entities, the IMF's advice is to fix their underlying problems, ie, restructure them (that is on the backburner since 2009) so that resources meant for public priority spending aren't diverted to them. While the IMF is silent on the options for privatising PSM, about PIA its implied advice is the same; "it is better to do things rightly than quickly".
You can't disagree with the IMF on this strategy but do find odd is that this advice wasn't given earlier, and firmly. Had that been done, PSM couldn't become bankrupt nor could PIA come close to the same stage, because during the years since the IMF extended its EFF, these entities were escalating Pakistan's fiscal deficit plugging which was all through Fund's top priority.
Of the seven IMF benchmarks, the one that can (hopefully) be achieved by end-February 2016 is implementing the Gas Theft, Control and Recovery Ordinance-2014 to improve governance in the gas sector. But inserting new clauses in the Anti-Money Laundering Act that define a variety of tax crimes, as well as the tools to combat tax evasion won't be completed by end-January 2016.
Of the many positive developments cited by the IMF (each accompanied by scenarios wherein it could turn negative), the one it finds commendable is Pakistan's external debt servicing capacity "during 2015-16" due to improved forex buffers, higher remittances, low oil prices, lower fiscal deficit, and promised inflows under the new World Bank and the Asian Development Bank loans.
To make its overly optimistic view - old debt being repaid out of fresh debt - seems realistic, the IMF has also cited factors that may erode Pakistan's debt servicing capacity beyond 2015-16, ie, falling exports and ongoing slide in global competitiveness reflected by a trade gap (7.5 percent of GDP) that is being plugged by remittances (7 percent of GDP in FY 2015), and other transfers.
Pakistan's exports declined by 14.4 percent while imports declined only by 7.86 percent (despite a huge drop in global oil prices) during July-December 2015 compared to the corresponding period in 2014, while inward remittances went up by 16.5 percent and provisional figures show that exports declined by 16.8 percent during December 2015, while imports wet up by 0.23 percent.
In global competitiveness Pakistan is ranked 138th among 189 countries, and is below the Middle Eastern and North African countries in almost every sub-category except market size because its ranking deteriorated over the last decade due to lack of regulatory reforms, FDI inflow, and technology transfer, because private and public investment averaged well below the required minimum level.
While the IMF has rightly cited these grave yet sustained distortions, what it ignores is the fact that its pressure for cutting the fiscal deficit (but not for cutting resource waste) forces cuts in development expenditure that result in continued erosion of the existing physical infrastructure, let alone expanding and making it more efficient to cut the cost of doing business.
Oddly, the IMF's last benchmark for reviewing Pakistan's future performance mandates focusing on devising "a time-bound plan with specific measures to improve the business climate." Undeniably, while devising this plan should be the top priority, completing it by end-February 2016 seems unlikely. That said achieving this benchmark needs prioritising because without improved business climate no other objective is achievable.
This is a tough challenge given President Obama's forecast that, for decades, instability will mar many parts of the world, and Pakistan could become a safe haven for new terrorist networks. While Pakistan's defence forces are doing their best to contain terrorism, the effort won't succeed without political support, which is far from impartial and committed. Letting top-ranking fraudsters escape is not way to improve the business climate.
The IMF believes that, by 2017-18, medium-term GDP growth can touch 6.5 percent if the government stabilises the business climate, ie, ensures security, stable policymaking, zero energy and power generation gaps (possible given the sliding global oil prices), impartial in regulatory systems and, above all, civil administration being driven solely by the law of the land. Ensuring this requires unbiased focus on all these areas, especially because South Asia and the Middle East will remain volatile courtesy Saudi-Iran tension. But is the PML-N regime conscious of the emerging threats and opportunities?
Comments
Comments are closed.