The International Monetary Fund (IMF) team is currently in Pakistan. In what is clearly not the norm the Fund staff has met with two members of the second largest party in parliament, the PML(N), namely Chief Minister Punjab Shahbaz Sharif as well as Ishaq Dar. In addition the IMF team is also scheduling meetings with a number of other key stakeholders as well as with the media.
The message of the Fund is to re-emphasise the legitimate reasons behind its decision to defer the fifth review of the Stand-By Arrangement (SBA) that took place in November 2010 - a deferral reflected by the refusal of the Fund to release the second last tranche of the SBA.
These reasons range from: the failure of the government to pass the Sales Tax Bill 2010, a value added tax disguised as Reformed General Sales Tax (RGST), through parliament due to the opposition from various political parties; the continuing heavy borrowing from the State Bank estimated at around 2 billion rupees per day (a SBA condition that the government complied with for the first two years of the programme), and failure to implement the reforms in the power sector that include eliminating the inter-circular debt as well as ending subsidies.
The government has been at pains to defend its lack of compliance on these critical conditions by pointing out that the scale and range of the summer floods compelled it to write-off the expenditure and revenue side of the budget for the current fiscal year - expenditure because of the need to meet the exceptional financial requirements of the 14 million flood victims and revenue because the government failed to implement the Sales Tax Bill 2010, a value added tax, as well as the Finance Amendment Ordinance 2010 that envisaged one-off income tax levy due to recalcitrance on the part of some of its coalition partners and the two PML's in the opposition.
In this context, the Federal Finance Minister is on record as having stated that the PML (N) had agreed to the imposition of RGST and implied that the decision of the PML (N) to actively oppose it in parliament was tantamount to playing to the gallery. This maybe the reason behind the Fund staff's decision to meet with PML (N) representatives: to successfully persuade the party leadership to withdraw its opposition in the greater national economic interest.
Critics of the government, led by the PML (N), insist that the government must generate revenue through reducing the bail-out packages to inefficiently run corruption-ridden state-owned entities (estimated at 300 billion rupees per annum) as well as reducing corruption within Federal Board of Revenue (estimated to account for 500 billion rupee annual leakages). These measures are unlikely to bear fruit in the short run as they require a change in our work ethics - a change that has been generational in other countries. One would hope that the Fund and the PML (N) legislators focus instead on increasing revenue generation through amending the tax system to become equitable, by taxing the income of the rich and ending all those currently exempt including the rich landlords, and non-anomalous to ensure that all have a level-playing field - be they the urban exporters or the urban professionals.
The federal government had agreed during the fifth review discussions that federal and provincial governments would together slash expenditure in an attempt to meet the requirements of the 18th Constitutional Amendment with the overall objective of ushering a new era of greater provincial autonomy and of fiscal discipline. Without the provinces and the federal government acting in concert to end fiscal mismanagement the achievement of the IMF-supported deficit target was correctly argued as being impossible. In this context, it is relevant to note that provincial governments that exceeded the required number of advisors as agreed under the 18th Constitutional Amendment, laid-off excess advisors recently. The federal government has yet to follow suit though reports indicate that a massive reduction in the number of ministers is on the cards. These changes though not major in terms of expenditure reduction are nonetheless symbolic of a mind shift that must be appreciated.
The question is: would the Fund staff succeed in convincing parliamentarians other than the PPP to agree to the need to comply with its conditions? It appears unlikely that the PML (N) would agree in parliament to the levy of RGST due to political compulsions but may agree to the issuance of SROs that effectively would end all sales tax exemptions excepting those on essentials like food. The IMF in turn must insist that the Punjab government follows a regimen of fiscal prudence and begins to generate revenue through levying a tax on the income of the rich landlords at the same rate as is being levied on the income of urban professionals or else seek another constitutional amendment that would relegate this subject to the Centre.
At this point in time, the government's foreign exchange reserve position is better than what it was in 2008 mainly because of the higher than expected improvement in the trade balance and the heavy remittance inflows. But the need for foreign assistance remains and that is unlikely to be forthcoming until the IMF can be convinced that the country's federal and provincial governments are on track.
In other words, it is hoped that the stakeholders either provide alternative proposals to increase revenue generation in the short-term, alternative to RGST, or else desist from demanding higher expenditure from the government on subsidies. With 70 percent of the budget expenditure under two heads, namely: debt servicing and defence - the weakness on revenue side is much more compared to the saving that could accrue from expenditure cuts. The uncertainty on the economic side is hurting new investment more than law and order conditions or even bad governance.
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