The fund’s language is getting tight along with building up of external pressures - reminding days of 2008. Although not narrated explicitly, political weakening is the underline tone and is showing that the government is losing its grip on macroeconomic stability. Fiscal slippage is looming and the IMF is not confident of the fiscal deficit numbers for both FY17 and FY18.
The directors are unanimous on growth outlook, but have also shown concerns on the policy implementation and macroeconomic vulnerabilities. The policy weakening is linked to political instability and economic management is perhaps on the back burner as the government machinery, including finance minister, is too busy in handling political chaos.
The fund is asking for fiscal consolidation by mobilising additional tax revenues, enhancing tax base and strengthening tax administration. The fact is that tax revenues are growing but the base is not as tax authorities are only pressing the existing tax base further; non tax payers have priced in the higher non-filer rates and are not willing to file returns.
The IMF has also emphasized on curtailing spending by controlling wage increase, further reducing electricity subsidies and enhancing social spending concurrently. Why does the government have a standard rate of increase in wages irrespective of inflation? The wage rise should be pegged to inflation as is the case in private sector. While it is good that the fund is asking for a control in wage growth, there is no debate on bringing fiscal spending discipline across the board by reducing inefficiencies in spending and curtailing excessive staff hiring at every government level.
In case of electricity subsidies, the toll must increase directly or indirectly as the fund is not pleased with accumulating power sector arrears. The good news however, is that over the period of time, the reduction in electricity subsidies has created room for BISP spending; though more needs to be done.
The provinces are required to collect their share of taxes as the fund recommends strengthening of national fiscal federalism framework. IMF took a snapshot of fiscal federalism across emerging economies, and Pakistan has a unique characteristic – provinces’ revenues share is much higher than their share in expenditures. The vertical asymmetry has limited the policy level capacity of federal government. The provinces do not have incentive to raise their own taxes as long as they get higher pie of revenues, the fund lamented.
The IMF hopes that the sudden accumulation of power sector arrears (the circular debt) is one-off in nature. At the same time, it also noticed that more vigilance is required as power sector generation is increasing. The IMF has once again stressed on DISCOS recovery, but according to an ex-power sector secretary, DISCOS collection cannot increase over 90 percent under current political reality. The only way to do so is to increase the tariffs i.e. all consumers pay for thefts. In a way, Fund is saying the same.
This is the story of the fiscal side, which has shown some consolidation as tax revenues in terms of GDP have increased in the past four years. But risks are emerging now. The bigger problem is on external front where fund has direct stakes. The current account deficit is reaching three percent in FY17 and is projected to remain higher than 3 percent in FY18. How to tackle it is the question?
The fund is content with economic growth and low inflation; fiscal management has issues but the external imbalances are the worst worries. A policy response from SBP is warranted. Right now, the monetary policy is too accommodative; will the central bank tighten the policy under new governor in July? Monetary tightening may not start till inflation start picking up as the real interest rates are still positive. The Fund has urged SBP to tighten the policy if inflationary pressure emerges or foreign exchange market pressure intensifies. The Fund could not be clearer on exchange rate adjustment as it has also emphasized at multiple places for authorities to allow for greater foreign exchange stability.
The IMF is not happy with administrative measures of curbing imports by enhancing cash margins. It is worried about falling exports and does not see them picking up soon. In Pakistan risk assessment matrix, risks associated with retreat from cross border integration, weak growth in key advanced and emerging economies, and significant slowdown of China, all would have an adverse impact on both exports and FDI.
“Resumption of accumulation of reserves—including through allowing downward exchange rate flexibility—is needed to further strengthen buffers while also supporting competitiveness”, the Fund summed up. The question is whether the government will act on the advice. Well, not now; but it would as soon as it knocks IMF’s door for another programme. Let’s hope against hope that day doesn’t not come.
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